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Parsimoneous Modeling of Yield Curves for U.S. Treasury Bills

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  • Charles R. Nelson
  • Andrew F. Siegel

Abstract

A new model is proposed for representinq the term to maturity structure of interest rates at a point in time.The model produces humped, monotonic and S-shaped yield curves using four parameters. Conditional on a time decay parameter, estimates of the other three are obtained by least squares. Yield curves for thirty-seven sets of U.S. Treasury bill yields with maturities up to one year are presented. The median standard deviation of fit is just over seven basis points and the corresponding median R-squared is .96. Study of residuals suggests the existence of specific maturity effects not previously identified. Using the models to predict the price of a long term bond provides a diagnostic check and suggests directions for further research.

Suggested Citation

  • 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.
    • Handle: RePEc:nbr:nberwo:1594
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    References listed on IDEAS

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    1. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
    2. 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.
    3. Richard, Scott F., 1978. "An arbitrage model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 33-57, March.
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    Cited by:

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    2. P. Jenkins, Stephen & Gardiner, Karen & Burgess, Simon & Propper, Carol, 2000. "Measuring income risk," ISER Working Paper Series 2000-15, Institute for Social and Economic Research.
    3. Ahn, Hie Joo, 2023. "Duration structure of unemployment hazards and the trend unemployment rate," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    4. Michael D. Bordo & Arunima Sinha, 2023. "The 1932 Federal Reserve Open‐Market Purchases as a Precedent for Quantitative Easing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(5), pages 1177-1212, August.

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