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Parsimonious Modeling of Yield Curves

Charles Nelson and Andrew F Siegel

The Journal of Business, 1987, vol. 60, issue 4, 473-89

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.

Date: 1987
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Handle: RePEc:ucp:jnlbus:v:60:y:1987:i:4:p:473-89