Zero Lower Bound Term Structure Modeling: A Practitioner's Guide(Applied Quantitative Finance)

Something unprecedented occurred in the wake of the 2008 global financial crisis. Interest rates in the world's six largest economies-excluding China-settled at or near zero percent, with many other economies in the same position. This phenomenon, only previously (and recently) seen in Japan, is so rare that the behavior of such rates and their relationships with the macro-economy are uncharted terrain to most. In Zero Lower Bound Term Structure Modeling, author Leo Krippner provides a clear-cut and much-needed guidebook for navigating this environment of near-zero interest rates. He has created a comprehensive reference for state of the art zero lower bound (ZLB) term structure modeling. Incorporating his own research in the field, Krippner shows how these models may be applied in practice to monetary policy and financial market issues in the ZLB environment. He begins with a straightforward introduction to the principles of standard term structure modeling and monetary policy, illustrating the complications introduced by ZLB conditions. Zero Lower Bound Term Structure Modeling then moves on to detail frameworks that realistically accommodate interest rates and bond prices constrained by the ZLB, including the estimation of these models. Krippner demonstrates how these models can be used to monitor the stance of unconventional monetary policy and manage fixed income portfolio risk. He also shows how they can be applied to macro-finance relationships and valuing bond options. Most importantly, this book demonstrates the ways in which standard term structure modeling can be seriously deficient in a ZLB environment and outlines how the frameworks Krippner introduces can fill the gap. Zero Lower Bound Term Structure Modeling arms readers with the necessary understanding and tools to make informed decisions about frameworks to use in the unique ZLB environment.

Table of Contents:
Chapter 1: Introduction Chapter 2: A New Framework for a New Environment Chapter 3: Gaussian Affine Term Structure Models Chapter 4: Krippner Framework for ZLB Term Structure Modeling Chapter 5: Black Framework for ZLB Term Structure Modeling Chapter 6: K-ANSM Foundations and "Effective Monetary Stimulus" Chapter 7: Monetary Policy Applications Chapter 8: Financial Market Applications Chapter 9: Conclusions and Future Research Directions Appendix A: Matrix Notation

About the Author :
Leo Krippner is a Senior Advisor in the Research Team of the Economics Department at the Reserve Bank of New Zealand, where he has worked since 2008. His research is focused on term structure modeling and its application to macro-finance. He has previously worked in fixed income portfolio management, both within the Reserve Bank's Financial Markets Department and the private sector. His most recent role was managing diversified portfolios and asset allocation as the Head of Investment Strategy at AMP Capital Investors.

Review :
"In this book, Leo Krippner thoughtfully explores the model's important implications for both investors and policy makers. Anyone interested in the term structure of interest rates will want to own this book." - Scott F. Richard, Practice Professor of Finance, The Wharton School, University of Pennsylvania and Former Managing Director and Fixed Income Portfolio Manager, Morgan Stanley Investment Management "A timely achievement, Leo's excellent book provides a detailed exposition of the recent progress made in term structure modeling in the new, post-crisis environment. Expertly written and technically superb, this book serves as a useful guide for academics and central bank practitioners alike. A worthwhile read for everyone working on shadow interest rates or interested in monetary policy at the zero lower bound." - Feng Zhu, Senior Economist, Bank for International Settlements "This book is timely in pointing researchers and practitioners to current developments in how to incorporate the zero lower bound in economic models of interest rates." - Jing Cynthia Wu, University of Chicago Booth School of Business "The most extensive treatment of fixed-income pricing in near-zero interest-rate regimes." - Attilio Meucci, Founder, SYMMYS and Chief Risk Officer, KKR