Affine Term Structure Pricing with Bond Supply as Factors

Fumio Hayashi
CQER Working Paper 16-01
April 2016

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This paper presents a theoretical model for analyzing the effect of the maturity structure of government debt on the yield curve. It is an ATSM (affine term structure model) in which the factors for the yield curve include, in addition to the short rate, the government bond supply for each maturity. The supply shock is not restricted to be perfectly correlated across maturities. The effect on the yield curve of a bond supply shock that is local to a maturity is largest at the maturity. This hump-shaped response of the yield curve persists in spite of the absence of preferred-habitat investors.

JEL classification: E43, E58, G12

Key words: ATSM, yield curve, portfolio balance channel, supply of government bonds, impulse responses

The author thanks Junko Koeda for posing the question studied in this paper and thanks participants at a Kyoto University workshop. The research reported here was supported by grants-in-aid from the Ministry of Education, Culture, Sports, Science, and Technology of the Japanese government (grant numbers 25285097 and 26870124). The views expressed here are the author's and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.
Please address questions regarding content to Fumio Hayashi, National Graduate Institute for Policy Studies, and National Bureau of Economic Research, Roppongi 7-22-1, Minato-ku, Tokyo, Japan 106-0032, fumio.hayashi@gmail.com.
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