An arbitrage-free three-factor term structure model and the recent behavior of long-term yields and distant-horizon forward rates

Don H. Kim and Jonathan Wright
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Don H. Kim: https://www.federalreserve.gov/econres/don-h-kim.htm

No 2005-33, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper reviews a simple three-factor arbitrage-free term structure model estimated by Federal Reserve Board staff and reports results obtained from fitting this model to U.S. Treasury yields since 1990. The model ascribes a large portion of the decline in long-term yields and distant-horizon forward rates since the middle of 2004 to a fall in term premiums. A variant of the model that incorporates inflation data indicates that about two-thirds of the decline in nominal term premiums owes to a fall in real term premiums, but estimated compensation for inflation risk has diminished as well.

Keywords: Interest rates; Econometric models (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mon
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Citations: View citations in EconPapers (131)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2005-33

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