Affine Term Structure Models with Stochastic Lower Bound: An Application to Euro-Area OIS Rates

27.02.2026 11:15 – 12:15

RESEARCH INSTITUTE FOR STATISTICS AND INFORMATION SCIENCE SEMINARS

ABSTRACT

Over the last decade, in a context of extremely low interest rates, different types of term-structure models have been proposed to accommodate the existence of a lower bound for nominal yields. The resulting zero-lower bound (ZLB) literature has however proven to be at odds with the advent of negative interest rates. This paper introduces a novel term structure model featuring a negative stochastic lower bound (SLB) at which the short rate may be stuck for some time. The model belongs to the affine class, which makes it particularly tractable. In particular, it offers closed-form formulas for yields, forecasts and conditional variances of interest rates. The existence of these formulas, combined with the fact that the dynamic model admits an affine representation, facilitates its estimation by means of Kalman filtering techniques. After having estimated it on euro-area data, we show how it can be exploited to recover market expectations regarding future moves of the lower bound or conditional distributions of lift-off dates.

(jointly with Alain Monfort (CREST), Jean-Paul Renne (HEC Lausanne), David Sabes (Banque de France))

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