Working Paper: NBER ID: w1594
Authors: 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.
Keywords: Yield Curve; Interest Rates; US Treasury Bills
JEL Codes: E43; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expectations of future yields (D84) | Term to maturity structure of yields (E43) |
| Maturity effects (D25) | Yield observations (C29) |
| Second-order differential equation model (C69) | Representation of the yield curve (E43) |
| Fitted yield curve (E43) | Long-term bond prices (E43) |