Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/263931 
Year of Publication: 
2022
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2022-011/III
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
We propose a smooth shadow-rate version of the dynamic Nelson-Siegel (DNS) model to analyze the term structure of interest rates during the recent zero lower bound (ZLB) period. By relaxing the no-arbitrage restriction, our shadow-rate model becomes highly tractable with a closed-form yield curve expression. The model easily permits the implementation of readily available DNS extensions such as time-varying loadings, integration of macroeconomic variables and time-varying volatility. Using U.S. Treasury data, we provide clear evidence of a smooth tran- sition of the yields entering and leaving the ZLB state. Moreover, we show that the smooth shadow-rate DNS model dominates the baseline DNS model in terms of fitting and forecasting the yield curve, while being competitive with a shadow-rate affine term structure model.
Subjects: 
Yield curve
zero lower bound
shadow-rate model
Nelson-Siegel curve
JEL: 
E43
E47
C53
C58
G12
Document Type: 
Working Paper

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