A term structure model with useful factors: assessing the impact of ECB's unconventional policies from 2014 to 2020.
Jointly written with Vahe Sahakyan (BIS) and Johannes Kramer (ECB)
A discrete-time no-dominance term structure model is developed. Four factors are modelled and explicitly defined to be: the short rate, the slope and curvature of the term structure of term-premia, and a measure that captures sovereign-specific features. We argue that these factors are directly useful for policy analysis and for investment professionals. An empirical application of the model is used to evaluate impacts on German and Italian yields of six ECB policy interventions from 2014 to 2020. We find that monetary policy actions during this period have compressed German yields by approximately 25, 85, and 125 basis points, at the 1Y, 5Y and 10Y maturities, respectively, and that these reductions exclusively result from changed to the term-premium component. In Italy the corresponding yield compressions are 55, 135, and 180 basis points, with the term premium component being responsible for approximately two-thirds of the action, while the remaining one-third stems from reductions in credit risk.
A Practitioner's Guide to Discrete-Time Yield Curve Modelling (With Empirical Illustrations and MATLAB Examples)
The text is available as an Element on Cambridge University Press DOI:https://doi.org/10.1017/9781108975537
I take a very practical approach and provide information on term stureture modelling and estimation techniques. I cover models that exclude arbitrage oportunities as well as ad-hoc approaches, Data and MATLAB codes used in the text can be downloaded from the above link.
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Ken Nyholm (c) - Updated March 2023