The expected real yield and inflation components of the nominal yield curve |
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| Institution: | 1. Department of Banking & Finance, Tamkang University, No. 151, Yingzhuan Road, Tamsui District, New Taipei City 25137, Taiwan;2. Graduate Institute of Management, College of Management, National Taiwan Normal University, No. 162, Section 1, Heping East Road, Taipei City 106, Taiwan;3. Department of Finance, Xiamen University, No. 422, Siming South Road, Xiamen, Fujian Province 361005, China;4. Academy of Financial Research, Zhejiang University, No. 866, Yuhangtang Road, Hangzhou, Zhejiang Province 310058, China;1. Division of Finance, College of Management, Innovation Center for Big Data and Digital Convergence, Yuan Ze University, Taiwan;2. Anderson School of Management, University of New Mexico, Albuquerque, NM 87131, USA;3. GreTai Securities Market, Taiwan;4. Graduate Institute of Management, College of Management, National Taiwan Normal University, Taiwan;1. Dip. Political Science, University of Naples Federico II, Naples, Italy;2. Dip. Statistics, University of Rome “La Sapienza”, Rome, Italy;1. Department of Banking and Finance, National Chiayi University, No. 580, Sinmin Road, Chiayi City 60054, Taiwan;2. Department of Finance, National Yunlin University of Science & Technology, No. 123, University Road, Section 3, Douliou City 64002, Taiwan;3. Department of Wealth and Taxation Management, National Kaohsiung University of Applied Sciences, No. 415, Chien-Kung Road, Sanmin District, Kaohsiung City 80778, Taiwan;4. Graduate Institute of Finance, National Pingtung University of Science and Technology, No. 1, Hseuhfu Road, Neipu, Pingtung 91201, Taiwan |
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| Abstract: | The term structure of real yields and expected inflation are two unobserved components of the nominal yield curve. The primary objectives of this study are to decompose nominal yields into their expected real yield and inflation components and to examine their behaviour using state-space and regime-switching frameworks. The dynamic yield-curve models capture three well-known latent factors – level, slope, and curvature – that accurately aggregate the information for the nominal yields and the expected real and inflation components for all maturities. The nominal yield curve is found to increase slightly with a slope of about 120 basis points, while the real yield curve slopes upward by about 20 basis points, and the expected inflation curve is virtually flat at slightly above 2 per cent. The regime-switching estimations reveal that the nominal yield, real yield and expected inflation curves have shifted down significantly since 1999. |
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| Keywords: | Yield curve Real interest rates Expected inflation factor model State-space model Regime-switching estimation |
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