The Central Tendency: A Second Factor in Bond Yields

29 Pages Posted: 7 Nov 2008

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group

Multiple version iconThere are 6 versions of this paper

Date Written: August 1996

Abstract

We assume that the instantaneous riskless rate reverts toward 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 it 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.

Keywords: term structure

Suggested Citation

Balduzzi, Pierluigi and Das, Sanjiv Ranjan and Foresi, Silverio, The Central Tendency: A Second Factor in Bond Yields (August 1996). NYU Working Paper No. FIN-96-012, Available at SSRN: https://ssrn.com/abstract=1297106

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
140 Commonwealth Avenue - Fulton Hall 438
Chestnut Hill, MA 02467
United States
617-552-3976 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www.bc.edu/bc_org/avp/csom/faculty/

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://srdas.github.io/

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group ( email )

32 Old Slip, 24th Floor
New York, NY 10005
United States
(212) 357-3508 (Phone)

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