Estimating shadow-rate term structure models with near-zero yields

christensen. h.e, jens; rudebushch.d, glenn;

Standard Gaussian affine dynamic term structure models do not rule
out negative nominal interest rates�a conspicuous defect with yields
near zero in many countries. Alternative shadow-rate models, which
respect the nonlinearity at the zero lower bound, have been rarely
used because of the extreme computational burden of their estimation.
However, by valuing the call option on negative shadow yields, we
provide estimates of a three-factor shadow-rate model of Japanese
yields.We validate our option-based results by closely matching them
using a simulation-based approach. We also show that the shadow
short rate is sensitive to model fit and specification.