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dc.contributor.authorBalduzzi, Pierluigi-
dc.contributor.authorDas, Sanjiv Ranjan-
dc.contributor.authorForesi, Silverio-
dc.description.abstractWe 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.en
dc.subjectterm structureen
dc.titleThe Central Tendency: A Second Factor in Bond Yieldsen
dc.typeWorking Paperen
Appears in Collections:Finance Working Papers

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