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

Article

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.

Keywords

Affine term structure model Deflation Expected inflation rate Inflation-indexed bond Real interest rate Regime shift Zero interest rate 

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Copyright information

© Springer Science+Business Media, LLC. 2009

Authors and Affiliations

  1. 1.Tokio Marine & Nichido Fire Insurance Co., Ltd.TokyoJapan
  2. 2.Graduate School of International Corporate StrategyHitotsubashi UniversityTokyoJapan

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