Arbitrage free term structure models and the zero lower bound

Specialeforsvar ved Bjørn Lemholt

Titel: Arbitrage Free Term Structure Models and the Zero Lower Bound

Abstract:  With nominal interest rates near the zero lower bound (ZLB) in many major economies,  the modelling of term structures show poor performance. This including the popular Gaussian a‑ne term structure models which do not rule out negative nominal interest rates. A solution could be Shadow rate models which respect the nonlinearity at the zero lower bound. An option-based shadow rate methodology is used to produce model candidates to handle the ZLB environment and using Japanese yield data the models are investigated. The Shadow rate model based on a three-factor arbitrage-free Nelson Siegel (AFNS) model show the best in-sample ts but when it comes to forecasting accuracy the model is beaten by a standard three factor AFNS model

 Vejleder: David Skovmand
Censor:   Jesper Lund, CBS