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Two Factors along the Yield Curve

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  • Gong, Fangxiong
  • Remolona, Eli M
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    Abstract

    Are all two-factor, term-structure models the same? The authors specify three models and estimate each on different parts of the U.S. yield curve. The exercise provides insights on reconciling the term structure's time series with its cross section and on relating it to fundamentals. The authors' evidence favors models where one factor reverts to a time-varying mean. One such model explains shorter-term yields and another longer-term yields. The models differ primarily because mean reversion is much faster near the yield curve's short end than near its long end. The factors seem to capture mean reversion in inflation and the Fed's target rate. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester

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    Bibliographic Info

    Article provided by University of Manchester in its journal The Manchester School of Economic & Social Studies.

    Volume (Year): 65 (1997)
    Issue (Month): 0 (Supplement)
    Pages: 1-31

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    Handle: RePEc:bla:manch2:v:65:y:1997:i:0:p:1-31

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    Web page: http://www.socialsciences.manchester.ac.uk/disciplines/economics/
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    Cited by:
    1. Fung, Ben & Mitnick, Scott & Remolona, Eli, 1999. "Uncovering Inflation Expectations and Risk Premiums From Internationally Integrated Financial Markets," Working Papers 99-6, Bank of Canada.
    2. Dong Heon Kim, 2004. "Nonlinearity in the Term Structure," Econometric Society 2004 Far Eastern Meetings 440, Econometric Society.
    3. Smith, Peter & Wickens, Michael, 2002. " Asset Pricing with Observable Stochastic Discount Factors," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 397-446, July.
    4. Peter Spencer, 2004. "Affine Macroeconomic Models of the Term Structure of Interest Rates: The US Treasury Market 1961-99," Discussion Papers 04/16, Department of Economics, University of York, revised Jan 2006.
    5. Fendel, Ralf, 2004. "Towards a Joint Characterization of Monetary Policy and the Dynamics of the Term Structure of Interest Rates," Discussion Paper Series 1: Economic Studies 2004,24, Deutsche Bundesbank, Research Centre.
    6. Michael J. Fleming & Eli M Remolona, 1999. "The term structure of announcement effects," BIS Working Papers 71, Bank for International Settlements.
    7. R.C. Stapleton & Marti G. Subrahmanyam, 1999. "The Term Structure of Interest Rate-Futures Prices," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-045, New York University, Leonard N. Stern School of Business-.

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