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Parsimonious Modeling of Yield Curves

Charles R. Nelson and Andrew F. Siegel
The Journal of Business
Vol. 60, No. 4 (Oct., 1987), pp. 473-489
Stable URL: http://www.jstor.org/stable/2352957
Page Count: 17
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Parsimonious Modeling of Yield Curves
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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. We find that the model explains 96% 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 .96 suggests that the model captures important attributes of the yield/maturity relation.

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