The Central Tendency: A Second Factor in Bond Yields

Pierluigi Balduzzi, Sanjiv Das () and Silverio Foresi

No 6325, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We assume that the instantaneous riskless rate reverts towards a central tendency which in turn, is changing stochastically over time. As a result, current short-term rates are not" sufficient to predict future short-term rates movements, as would be the case if the central" tendency was constant. However, since longer-maturity bond prices incorporate information" about the central tendency, longer-maturity bond yields can be used to predict future short-term" rate movements. We develop a two-factor model of the term-structure which implies that a" linear combination of any two rates can be used as a proxy for the central tendency. Based on" this central-tendency proxy, we estimate a model of the one-month rate which performs better" than models which assume the central tendency to be constant.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 1997-12
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Review of Economics and Statistics, Vol. 80, no. 1 (February 1998): 62-72.

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Working Paper: The Central Tendency: A Second Factor in Bond Yields (1996)
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