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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26951

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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