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Anh Le, Penn State University Print
Monday, 08 October 2018, 16:30 - 18:00

Joint with KULeuven, NBB, UCLouvain and ULB

Anh Le, Penn State University

Tractable Term-Structure Models and the Zero Lower Bound

Abstract : We greatly expand the space of tractable term-structure models. Key to our approach is a direct specification of bond pricing functions, that does not require an explicit pricing kernel, but that nonetheless guarantees absence of dominant trading strategies. We study a special case of our models that can be viewed as a generalized Nelson-Siegel model designed to be consistent with the zero lower bound (ZLB) of interest rates. Model-implied bond prices are available in closed-form and estimation of the model is straightforward. We show, through simulations, that our model can offer forecasting performances comparable to existing ZLB models. Variants of our ZLB-consistent model can also provide a good fit to the time-varying volatility and correlation structure of bond yields. 

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