The Central Tendency: A Second Factor in Bond Yields

14 Pages Posted: 11 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: January 1995

Abstract

We assume the short-term rate to revert towards a central tendency which in, turn, is stochastically changing over time. We impose minimal restrictions on the joint behavior of the short-term rate and the central-tendency factor, and derive implications for the term structure of interest rates. The analysis suggests a proxy for the central tendency which is then used to estimate the short-term rate process. Our model captures variations in the short-term rate better than the Vasicek (1977) and Cox, Ingersoll and Ross (1985) models, where the central tendency is assumed to be constant. Also, the central-tendency proxy explains the conditional volatility of the short-term rate better than the short-term rate itself.

Keywords: term structure

Suggested Citation

Balduzzi, Pierluigi and Das, Sanjiv Ranjan and Foresi, Silverio, The Central Tendency: A Second Factor in Bond Yields (January 1995). NYU Working Paper No. FIN-94-009, Available at SSRN: https://ssrn.com/abstract=1298812

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
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Chestnut Hill, MA 02467
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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
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Santa Clara, CA 95053
United States

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

Silverio Foresi

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

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New York, NY 10005
United States
(212) 357-3508 (Phone)

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