Market Segmentation and Limits to Arbitrage under Negative Interest Rates : Evidence from the Bank of Japan’s QQE

This paper decomposes the bond yield into the segmentation factor using Japan's unique dataset. For controlling the channel of future expectation and the term premium, we take advantage of the government guaranteed bond, which is the identical asset as the government bond except the liquidity and has not institutionally affected by the demand of BOJ, and extends Krishnamurthy et al. (2015) model for capturing the liquidity factor explicitly. Our result shows the market has segmented during the time when the government bond yield turns negative although the segmentation factor is considerably small during the normal time