Parsimonious Modeling of Yield Curves

1987/01/01 by Charles R. Nelson, Andrew F. Siegel · 28 citations
Physics and Astronomy · Economics, Econometrics and Finance · #Theoretical and Computational Physics #Monetary Policy and Economic Impact #Credit Risk and Financial Regulations

paper · doi:10.1086/296409

Abstract

This paper introduces a parametrically parsimonious model for yield curves that has the ability to represent the shapes generally associated with yield curves: monotonic, humped, and S-shaped. The authors find that the model explains 96 percent of the variation in bill yields across maturities during the period 1981-83. The movement of the parameters through time reflects and confirms a change in Federal Reserve monetary policy in late 1982. The ability of the fitted curves to predict the price of the long-term Treasury bond with a correlation of 0.96 suggests that the model captures important attributes of the yield/maturity relation. Copyright 1987 by the University of Chicago.

Citations

• Expectations, the Term Structure of Interest Rates, and Recent British Experience

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