Modelling the Yield Curve
38 Pages Posted: 15 Feb 2006
Date Written: December 1991
We test and estimate a variety of alternative models of the yield curve, using weekly, high-quality U.K. data. We extend the Campbell-Shiller technique to the overlapping data case and apply it to reject the pure expectations hypothesis under rational expectations. We also find that risk measures, in the form of conditional interest rate volatility, are unable to explain the term premium. A simple, market segmentation approach is, however, moderately successful in explaining the term premium.
Keywords: interest rates, term structure, expectations, risk, market segmentation
JEL Classification: E43
Suggested Citation: Suggested Citation