Economics at your fingertips  

Modelling the Yield Curve: A Two Components Approach

John Hatgioannides, Menelaos Karanasos () and Marika Karanassou ()
Additional contact information
John Hatgioannides: City University

No 519, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: Using parametric return autocorrelation tests and non parametric variance ratio statistics show that the UK and US short-term interest rates are unit root processes with significant mean reverting components. Congruent with this empirical evidence, we develop a new continuous time term structure model which assumes that the dynamics of the instantaneous interest rate are given by the joint effect of a (stationary) mean reverting component and a (nonstationary) martingale component. We provide a closed-form solution for the equilibrium yield curve when the temporary component is modelled as an Ornstein-Uhlenbeck process and the permanent component is modelled as an Arithmetic Brownian motion process.

Keywords: Term structure; Mean reversion; Random walk; Brownian motion; Variance ratio; Linear regression (search for similar items in EconPapers)
JEL-codes: C20 E43 G12 (search for similar items in EconPapers)
Date: 2004-09
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Working Papers from Queen Mary University of London, School of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Nicholas Owen ( this e-mail address is bad, please contact ).

Page updated 2021-04-09
Handle: RePEc:qmw:qmwecw:wp519