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Parsimonious Modeling of Yield Curves

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  • Nelson, Charles R
  • Siegel, Andrew F

Abstract

This paper introduces a parametrically parsimonious model for yield curves that has the ability to represent the shapes generally associated with yield curves: monotonic, humped, and S-shaped. The authors find that the model explains 96 percent of the variation in bill yields across maturities during the period 1981-83. The movement of the parameters through time reflects and confirms a change in Federal Reserve monetary policy in late 1982. The ability of the fitted curves to predict the price of the long-term Treasury bond with a correlation of 0.96 suggests that the model captures important attributes of the yield/maturity relation. Copyright 1987 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 60 (1987)
Issue (Month): 4 (October)
Pages: 473-89

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Handle: RePEc:ucp:jnlbus:v:60:y:1987:i:4:p:473-89

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Web page: http://www.journals.uchicago.edu/JB/

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