An Arbitrage-Free Three-Factor Term Structure Model and the Recent Behavior of Long-Term Yields and Distant-Horizon Forward Rates

Posted: 2 Jul 2021

See all articles by Don H. Kim

Don H. Kim

Board of Governors of the Federal Reserve System

Jonathan H. Wright

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: 2005

Abstract

This paper reviews a simple three-factor arbitrage-free term structure model estimated by Federal Reserve Board staff and reports results obtained from fitting this model to U.S. Treasury yields since 1990. The model ascribes a large portion of the decline in long-term yields and distant-horizon forward rates since the middle of 2004 to a fall in term premiums. A variant of the model that incorporates inflation data indicates that about two-thirds of the decline in nominal term premiums owes to a fall in real term premiums, but estimated compensation for inflation risk has diminished as well.

Suggested Citation

Kim, Don H. and Wright, Jonathan H., An Arbitrage-Free Three-Factor Term Structure Model and the Recent Behavior of Long-Term Yields and Distant-Horizon Forward Rates (2005). Available at SSRN: https://ssrn.com/abstract=3877804

Don H. Kim (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jonathan H. Wright

affiliation not provided to SSRN

No Address Available

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
24
PlumX Metrics