[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/6325.html
   My bibliography  Save this paper

The Central Tendency: A Second Factor in Bond Yields

Author

Listed:
  • Pierluigi Balduzzi
  • Sanjiv Ranjan Das
  • Silverio Foresi
Abstract
We assume that the instantaneous riskless rate reverts towards 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 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.

Suggested Citation

  • Pierluigi Balduzzi & Sanjiv Ranjan Das & Silverio Foresi, 1997. "The Central Tendency: A Second Factor in Bond Yields," NBER Working Papers 6325, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6325
    Note: AP
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w6325.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    2. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
    3. N. Gregory Mankiw, 1986. "The Term Structure of Interest Rates Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 61-110.
    4. Chan, K C, et al, 1992. "An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-1227, July.
    5. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    6. Pearson, Neil D & Sun, Tong-Sheng, 1994. "Exploiting the Conditional Density in Estimating the Term Structure: An Application to the Cox, Ingersoll, and Ross Model," Journal of Finance, American Finance Association, vol. 49(4), pages 1279-1304, September.
    7. Brennan, Michael J. & Schwartz, Eduardo S., 1979. "A continuous time approach to the pricing of bonds," Journal of Banking & Finance, Elsevier, vol. 3(2), pages 133-155, July.
    8. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-692, September.
    9. Michael J. Brennan and Eduardo S. Schwartz., 1979. "A Continuous-Time Approach to the Pricing of Bonds," Research Program in Finance Working Papers 85, University of California at Berkeley.
    10. Longstaff, Francis A & Schwartz, Eduardo S, 1992. "Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, vol. 47(4), pages 1259-1282, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:wyi:journl:002109 is not listed on IDEAS
    2. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
    3. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    4. Giuseppe Arbia & Michele Di Marcantonio, 2015. "Forecasting Interest Rates Using Geostatistical Techniques," Econometrics, MDPI, vol. 3(4), pages 1-28, November.
    5. Jin-Chuan Duan & Kris Jacobs, 2001. "Short and Long Memory in Equilibrium Interest Rate Dynamics," CIRANO Working Papers 2001s-22, CIRANO.
    6. Duan, Jin-Chuan & Jacobs, Kris, 2008. "Is long memory necessary? An empirical investigation of nonnegative interest rate processes," Journal of Empirical Finance, Elsevier, vol. 15(3), pages 567-581, June.
    7. Andrew Jeffrey & Linton, Oliver Linton & Thong Nguyen & Peter C.B. Phillips, 2001. "Nonparametric Estimation of a Multifactor Heath-Jarrow-Morton Model: An Integrated Approach," Cowles Foundation Discussion Papers 1311, Cowles Foundation for Research in Economics, Yale University.
    8. Christiansen, Charlotte, 2005. "Multivariate term structure models with level and heteroskedasticity effects," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1037-1057, May.
    9. Jagannathan, Ravi & Kaplin, Andrew & Sun, Steve, 2003. "An evaluation of multi-factor CIR models using LIBOR, swap rates, and cap and swaption prices," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 113-146.
    10. Ball, Clifford A. & Torous, Walter N., 1996. "Unit roots and the estimation of interest rate dynamics," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 215-238, June.
    11. Kuo, Shew-Huei, 2000. "An examination of the evolving relationship between interest rates of different maturities in Japan, and test of the expectations hypothesis of the term structure to ascertain the feasibility of using," ISU General Staff Papers 2000010108000014910, Iowa State University, Department of Economics.
    12. Mahdavi, Mahnaz, 2008. "A comparison of international short-term rates under no arbitrage condition," Global Finance Journal, Elsevier, vol. 18(3), pages 303-318.
    13. Jondeau, E. & Sedillot, F., 1998. "La prevision des taux longs français et allemands a partir d'un modele a anticipations rationnelles," Working papers 55, Banque de France.
    14. David K. Backus & Stanley E. Zin, 1994. "Reverse Engineering the Yield Curve," Working Papers 94-09, New York University, Leonard N. Stern School of Business, Department of Economics.
    15. Fergusson, Kevin, 2020. "Less-Expensive Valuation And Reserving Of Long-Dated Variable Annuities When Interest Rates And Mortality Rates Are Stochastic," ASTIN Bulletin, Cambridge University Press, vol. 50(2), pages 381-417, May.
    16. repec:uts:finphd:40 is not listed on IDEAS
    17. Lourdes Gómez-Valle & Julia Martínez-Rodríguez, 2010. "Improving the term structure of interest rates: two-factor models," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 275-287.
    18. Zhiwu Chen & Gurdip Bakshi, 2001. "Stock Valuation in Dynamic Economics," Yale School of Management Working Papers ysm198, Yale School of Management.
    19. Boero, G. & Torricelli, C., 1996. "A comparative evaluation of alternative models of the term structure of interest rates," European Journal of Operational Research, Elsevier, vol. 93(1), pages 205-223, August.
    20. Dillen, Hans, 1997. "A model of the term structure of interest rates in an open economy with regime shifts1," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 795-819, September.
    21. Gibson, Rajna & Lhabitant, Francois-Serge & Talay, Denis, 2010. "Modeling the Term Structure of Interest Rates: A Review of the Literature," Foundations and Trends(R) in Finance, now publishers, vol. 5(1–2), pages 1-156, December.
    22. repec:wyi:journl:002108 is not listed on IDEAS
    23. Jan Baldeaux & Fung & Katja Ignatieva & Eckhard Platen, 2015. "A Hybrid Model for Pricing and Hedging of Long-dated Bonds," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(4), pages 366-398, September.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:6325. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.