2013-34 | January 2016
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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. One is a normal state, the other is a zero-bound state that represents the case when the monetary policy target rate is at its zero lower bound for a prolonged period. The model delivers estimates of the time-varying probability of exiting the zero-bound state, and it outperforms standard three- and four-factor term structure models as well as a shadow rate model at matching short-rate expectations and the compression in yield volatility near the zero lower bound.
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Christensen, Jens H. E. 2016. "A Regime-Switching Model of the Yield Curve at the Zero Bound ," Federal Reserve Bank of San Francisco Working Paper 2013-34. Available at https://doi.org/10.24148/wp2013-34