Parsimonious Modeling of Yield Curves

  • Nelson C
  • Siegel A
  • 273

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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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Authors

  • Charles R. Nelson

  • Andrew F. Siegel

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