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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26951
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| Title: | The Central Tendency: A Second Factor in Bond Yields |
| Authors: | Balduzzi, Pierluigi
Das, Sanjiv Ranjan
Foresi, Silverio |
| Keywords: | term structure |
| Issue Date: | Aug-1996 |
| Series/Report no.: | FIN-96-012 |
| 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. |
| URI: | http://hdl.handle.net/2451/26951 |
| Appears in Collections: | Finance Working Papers
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