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MODELING THE TERM STRUCTURE FROM THE ON‐THE‐RUN TREASURY YIELD CURVE
Author(s) -
Mansi Sattar A.,
Phillips Jeffery H.
Publication year - 2001
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2001.tb00830.x
Subject(s) - yield curve , term (time) , a priori and a posteriori , econometrics , treasury , exponential smoothing , exponential function , sample (material) , yield (engineering) , non linear least squares , mathematics , affine term structure model , statistics , estimation theory , mathematical analysis , philosophy , chemistry , physics , materials science , archaeology , epistemology , chromatography , quantum mechanics , metallurgy , history
We propose a new model to estimate the term structure of interest rates using observed on‐the‐run Treasury yields. The new model is an improvement over models that require a priori knowledge of the shape of the yield curve to estimate the term structure. The general form of the model is an exponential function that depends on the estimation of four parameters fit by nonlinear least squares and has straightforward interpretations. In comparing the proposed model with current yield‐curve‐smoothing models, we find that, for the data used, the proposed model does best overall in terms of pricing accuracy both in sample and out of sample. JEL classification: E43, G12