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Author:Kim, Don H. 

Working Paper
An arbitrage-free three-factor term structure model and the recent behavior of long-term yields and distant-horizon forward rates

This paper reviews a simple three-factor arbitrage-free term structure model estimated by Federal Reserve Board staff and reports results obtained from fitting this model to U.S. Treasury yields since 1990. The model ascribes a large portion of the decline in long-term yields and distant-horizon forward rates since the middle of 2004 to a fall in term premiums. A variant of the model that incorporates inflation data indicates that about two-thirds of the decline in nominal term premiums owes to a fall in real term premiums, but estimated compensation for inflation risk has diminished as well.
Finance and Economics Discussion Series , Paper 2005-33

Working Paper
Challenges in macro-finance modeling

This paper discusses various challenges in the specification and implementation of ?macro-finance? models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. I classify macro-finance models into pure latent-factor models (?internal basis models?) and models which have observed macroeconomic variables as state variables (?external basis models?), and examine the underlying assumptions behind these models. Particular attention is paid to the issue of unspanned short-run fluctuations in macro variables and their potentially adverse ...
Finance and Economics Discussion Series , Paper 2008-06

Working Paper
Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices

We examine the informational content of TIPS yields from the viewpoint of a general 3-factor no-arbitrage term structure model of inflation and interest rates. Our empirical results indicate that TIPS yields contained a "liquidity premium" that was until recently quite large (~ 1%). Key features of this premium are difficult to account for in a rational pricing framework, suggesting that TIPS may not have been priced efficiently in its early years. Besides the liquidity premium, a time-varying inflation risk premium complicates the interpretation of the TIPS breakeven inflation rate (the ...
Finance and Economics Discussion Series , Paper 2008-30

Discussion Paper
Front-End Term Premiums in Federal Funds Futures Rates and Implied Probabilities of Future Rate Hikes

In this note, we examine empirical evidence on term premiums at the very front end, utilizing federal funds futures data as well as responses to the Desk's sell-side survey (Survey of Primary Dealers, or PD survey) and buy-side survey (Survey of Market Participants), and discuss plausible front-end term premium assumptions that one can use to extract probabilities of a rate hike at upcoming meetings from market quotes.
FEDS Notes , Paper 2016-11-18

Working Paper
Term structure estimation with survey data on interest rate forecasts

The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as additional input to the estimation to overcome the problem. The three-factor pure-Gaussian model thus estimated with the U.S. Treasury term structure for the 1990-2003 period generates a stable estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations ...
Finance and Economics Discussion Series , Paper 2005-48

Working Paper
Are Shadow Rate Models of the Treasury Yield Curve Structurally Stable?

We examine the structural stability of Gaussian shadow rate term structure models of Treasury yields over a period that includes the time during which the U.S. policy rate was at its effective lower bound. After a conceptual discussion of several potential sources of a structural break in the context of the shadow rate model, we document various pieces of evidence for structural instability based on predictive tests and Lagrange multiplier tests, as well as with separate estimations of the pre-ELB and post-ELB subsamples. In order to overcome the difficulties associated with the latent-factor ...
Finance and Economics Discussion Series , Paper 2020-061

Discussion Paper
Tips from TIPS: Update and Discussions

In this Note, we update and extend the estimation to a longer period from 1983 to the present.
FEDS Notes , Paper 2019-05-21-1

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