Finance and Economics Discussion Series

Term Structure Modelling with Supply Factors and the Federal Reserve's Large Scale Asset Purchase Programs

Canlin Li and Min Wei
2012-37

Abstract: This paper proposes and estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and applies it to evaluate the term premium effects of Federal Reserve's Large Scale Asset Purchase programs. Our estimates show that the first and the second large-scale asset purchase programs and the Maturity Extension program have a combined effect of about 100 basis points on the 10-year Treasury yield.

Keywords: Yield curve, preferred habitat, supply effects, factor models, state-space models, large-scale asset purchases (LSAP)

Note: A revised version of this paper is posted as FEDS Working Paper #2014-07.