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Multi-factor Affine Term Structure Model with Single Regime Shift: Real Term Structure under Zero Interest Rate

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Abstract

In this paper, we extend the one-factor, single regime shift, affine term structure model with time-dependent regime-shift probability to a multi-factor model. We model the nominal interest rate and the expected inflation rate, and estimate the term structure of the real interest rate in the Japanese government bond market using inflation-indexed bond data under zero interest rates. Incorporating the economic structure that the Bank of Japan terminates the zero interest rate when the expected inflation rate gets out of deflationary regime, we estimate the yield curve of the real interest rate for less than 10 years, consistent with the expectation of the market participants in the Japanese government bond market, where inflation-indexed bonds are traded for only around 10 years.

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Authors and Affiliations

  1. Tokio Marine & Nichido Fire Insurance Co., Ltd., WEST 14th Floor, Otemachi First Square 1-5-1, Otemachi, Chiyoda-ku, Tokyo, 100-0004, Japan

    Hidenori Futami

  2. Graduate School of International Corporate Strategy, Hitotsubashi University, 2-1-2 Hitotsubashi, Chiyoda-ku, Tokyo, 101-8439, Japan

    Hidenori Futami

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  1. Hidenori Futami
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Correspondence to Hidenori Futami.

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Futami, H. Multi-factor Affine Term Structure Model with Single Regime Shift: Real Term Structure under Zero Interest Rate. Asia-Pac Financ Markets 16, 347–369 (2009). https://doi.org/10.1007/s10690-009-9098-0

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  • DOI: https://doi.org/10.1007/s10690-009-9098-0

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