Tractable Term-Structure Models and the Zero Lower Bound

Bruno Feunou, Jean-Sébastien Fontaine, Anh Le & Christian Lundblad
We greatly expand the space of tractable term-structure models. We consider one example that combines positive yields with rich volatility and correlation dynamics. Bond prices are expressed in closed form and estimation is straightforward. We find that the early stages of a recession have distinct effects on yield volatility. Upon entering a recession when yields are far from the lower bound, (i) the volatility term structure becomes flatter, (ii) the level and slope of yields...
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