Title: | The Central Tendency: A Second Factor in Bond Yields |
Authors: | Balduzzi, Pierluigi Das, Sanjiv Ranjan Foresi, Silverio |
Keywords: | term structure |
Issue Date: | Jan-1995 |
Series/Report no.: | FIN-94-009 |
Abstract: | We assume the short-term rate to revert towards a central tendency which in, turn, is stochastically changing over time. We impose minimal restrictions on the joint behavior of the short-term rate and the central-tendency factor, and derive implications for the term structure of interest rates. The analysis suggests a proxy for the central tendency which is then used to estimate the short-term rate process. Our model captures variations in the short-term rate better than the Vasicek (1977) and Cox, Ingersoll and Ross (1985) models, where the central tendency is assumed to be constant. Also, the central-tendency proxy explains the conditional volatility of the short-term rate better than the short-term rate itself. |
URI: | http://hdl.handle.net/2451/27159 |
Appears in Collections: | Finance Working Papers |
Files in This Item:
File | Description | Size | Format | |
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wpa94009.pdf | 454.76 kB | Adobe PDF | View/Open |
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