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A Quantitative Yield Curve Model for Estimating the Term Structure of Interest Rates

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  • Echols, Michael E.
  • Elliott, Jan Walter

Abstract

In this paper, we present a new model for the measurement of yield curve relationships that is derived from interest rate theory, utilizes an objective procedure, and provides measures of the accuracy of the results obtained. In empirical tests of the model, the structure postulated is found to consistently provide a high level of explained variation in observed market yields on U.S. Treasury bonds. In a comparison with a yield curve model previously offered by Cohen et al., the present model is superior in terms of both goodness of fit and other associated statistical criteria. Clear evidence exists that the impact of coupon level upon yield is statistically significant, consistently positive in direction, substantial in magnitude, and variable over time. These results indicate that correction for coupon differences in the calculation of forward rates for use in empirical tests of interest rate theory is necessary in order to obtain reliable results. Finally, the yield curve model is used to calculate estimates of the risk-free pure discount rate.

Suggested Citation

  • Echols, Michael E. & Elliott, Jan Walter, 1976. "A Quantitative Yield Curve Model for Estimating the Term Structure of Interest Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(1), pages 87-114, March.
    • Handle: RePEc:cup:jfinqa:v:11:y:1976:i:01:p:87-114_02
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    Cited by:

    1. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722, Elsevier.
    2. Charles R. Nelson & Andrew F. Siegel, 1985. "Parsimoneous Modeling of Yield Curves for U.S. Treasury Bills," NBER Working Papers 1594, National Bureau of Economic Research, Inc.
    3. Richard Deaves & Mahmut Parlar, 2000. "A generalized bootstrap method to determine the yield curve," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(4), pages 257-270.
    4. Pham, Toan M., 1998. "Estimation of the term structure of interest rates: an international perspective," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 265-283, September.
    5. Hall, A.D, 1999. "Parametric forecasts of Australian yield curves," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 48(4), pages 541-549.
    6. Christopher M. Bilson & Timothy J. Brailsford & Luke J. Sullivan & Sirimon Treepongkaruna, 2008. "Pricing Bonds in the Australian Market," Australian Journal of Management, Australian School of Business, vol. 33(1), pages 123-143, June.

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