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Working Paper
A Regime-Switching Model of the Yield Curve at the Zero Bound
This paper presents a regime-switching model of the yield curve with two states: a normal state and a zero-bound state for the case when the monetary policy target rate is stuck at the nominal zero bound, as the U.S. economy has been since December 2008. The model delivers estimates of the time-varying probability of exiting the zero-bound state and can be applied to generate outcome-contingent forecasts useful for portfolio stress tests. The results show that the probability of remaining in the zero-bound state has trended upward since 2009, with notable upticks following Federal Reserve ...
Working Paper
Can Spanned Term Structure Factors Drive Stochastic Yield Volatility?
The ability of the usual factors from empirical arbitrage-free representations of the term structure?that is, spanned factors?to account for interest rate volatility dynamics has been much debated. We examine this issue with a comprehensive set of new arbitrage-free term structure specifications that allow for spanned stochastic volatility to be linked to one or more of the yield curve factors. Using U.S. Treasury yields, we find that much realized stochastic volatility cannot be associated with spanned term structure factors. However, a simulation study reveals that the usual realized ...