Working Paper

Term Structure Modeling with Supply Factors and the Federal Reserve's Large Scale Asset Purchase Programs

Abstract: This paper estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and uses it to evaluate the term premium effects of the Federal Reserve's large-scale asset purchase programs. Our estimates show that the first and the second large-scale asset purchase programs and the maturity extension program jointly reduced the 10-year Treasury yield by about 100 basis points.

Keywords: No-arbitrage term structure models; Yield curve; Preferred habitat; Supply effects; Factor models; large-scale asset purchases; Agency mortgage-backed securities (MBS);

JEL Classification: G1; E4; C5;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2014-03-24

Number: 2014-07

Note: This paper is a revised version of FEDS Working Paper 2012-37