NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Modeling Bond Yields in Finance and Macroeconomics

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Francis X. Diebold, Monika Piazzesi, Glenn Rudebusch

NBER Working Paper No. 11089
Issued in January 2005
NBER Program(s):   AP   EFG   ME

From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affne no-arbitrage term structure models.

Published: Diebold, Francis X., Monika Piazzesi and Glenn D. Rudebusch. "Modeling Bonds Yields In Finance And Macroeconomics," American Economic Review, 2005, v95(2,May), 415-420.

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