The Central Tendency: A Second Factor in Bond Yields
Sanjiv Das () and
No 6325, NBER Working Papers from National Bureau of Economic Research, Inc
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)
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Published as Review of Economics and Statistics, Vol. 80, no. 1 (February 1998): 62-72.
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Journal Article: The Central Tendency: A Second Factor In Bond Yields (1998)
Working Paper: The Central Tendency: A Second Factor in Bond Yields (1996)
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