Modelling the Yield Curve

December 1, 1991

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We test and estimate a variety of alternative models of the yield curve, using weekly, high-quality U.K. data. We extend the Campbell-Shiller technique to the overlapping data case and apply it to reject the pure expectations hypothesis under rational expectations. We also find that risk measures, in the form of conditional interest rate volatility, are unable to explain the term premium. A simple, market segmentation approach is, however, moderately successful in explaining the term premium.

Subject: Bonds, Econometric analysis, Financial institutions, Financial services, Short term interest rates, Treasury bills and bonds, Vector autoregression, Yield curve

Keywords: bond maturity, Bonds, expectations, interest rate data, interest rates, market segmentation, moving average, n-period bond, redemption value, redemption yield, risk, short interest, Short term interest rates, T-Bill rate, Taylor series, term premia, term structure, Treasury bills and bonds, U.K. yield curve, Vector autoregression, WP, Yield curve, yield gap

Pages:
38
Volume:
1991
DOI:
https://doi.org/10.5089/9781451931457.001
Issue:
134
Series:
Working Paper No. 1991/134
Stock No:
WPIEA1341991
ISBN:
9781451931457
ISSN:
1018-5941

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