Download This PaperThe Central Tendency: A Second Factor in Bond Yields
23 Pages Posted: 11 Nov 2008
There are 6 versions of this paper
The Central Tendency: A Second Factor in Bond Yields
The Central Tendency: A Second Factor in Bond Yields
The Central Tendency: A Second Factor in Bond Yields
The Central Tendency: A Second Factor in Bond Yields
The Central Tendency: A Second Factor in Bond Yields
The Central Tendency: A Second Factor in Bond Yields
Date Written: November 1995
Abstract
We assume that the instantaneous riskless rate reverts towards a central tendency which, in turn, is changing stochastically over time, and we derive a model of the term structure of interest rates. Our term-structure model implies that a linear combination of any two rates can be used as a proxy of the central tendency. Based on the 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
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