Finance and Economics Discussion Series

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

Canlin Li and Min Wei
2014-07

Abstract: This paper estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and uses it to evaluate the term premium effects of the 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 jointly reduced the 10-year Treasury yield by about 100 basis points.

Keywords: No-arbitrage term structure models, yield curve, preferred habitat, supply effects, factor models, large-scale asset purchases (LSAP), agency mortgage-backed securities (MBS)

Note: This paper is a revised version of FEDS Working Paper #2012-37.