An Empirical Approach to Modeling the Term Structure of the Japanese Government Bond Yields

Chikashi Tsuji

doi:10.5539/jms.v5n2p24

Abstract

This paper aims to empirically model the term structure of the Japanese government bond (JGB) yields. Specifically, we use bivariate-vector error correction models (VECMs) and attempt to capture the relations between various shorter-term and longer-term JGB yields. The interesting findings derived from our investigations by applying VECMs are as follows. 1) First, we find that the linkage between longer-term JGB yields and shorter-term JGB yields is effectively captured by the cointegrating equations (CEs) in the VECMs. 2) Second, we also reveal that, in general, the CEs in the VECMs for the JGBs’ term structure statistically significantly explain the next month’s time-series changes of the longer-term JGB yields.

Highlights

Term structure of interest rates is one of the appealing and interesting research topics in the fields of economics and finance because it includes rich information as to the economy and financial markets
1) First, we find that the linkage between longer-term Japanese government bond (JGB) yields and shorter-term JGB yields is effectively captured by the cointegrating equations (CEs) in the vector error correction models (VECMs). 2) Second, we reveal that, in general, the CEs in the VECMs for the JGBs’ term structure statistically significantly explain the month’s time-series changes of the longer-term JGB yields
1) First, we evidenced that the relations between longer-term JGB yields and shorter-term JGB yields were effectively captured by the CEs in the VECMs. 2) Second, the CEs in the VECMs for the JGBs’ term structure statistically significantly explained the time-series changes of the longer-term JGB yields in general

Summary

Introduction

Term structure of interest rates is one of the appealing and interesting research topics in the fields of economics and finance because it includes rich information as to the economy and financial markets. It seems to be difficult for modeling the dynamic evolution of the term structure of interest rates effectively; one theory cannot always explain its shape and the relations among various yields of different maturities. Using bivariate-vector error correction models (VECMs), we attempt to capture the various relations between shorter-term and longer-term JGB yields. As to the organization of this paper, the section reviews the recent related studies, Section 3 documents our data and variables, Section 4 explains our models, Section 5 describes the estimation results of our VECMs, and Section 6 concludes the paper

Objectives

Results

Conclusion