Parsimoneous Modeling of Yield Curves for U.S. Treasury Bills
Charles R. Nelson, Andrew F. Siegel
NBER Working Paper No. 1594 (Also Reprint No. r1035)
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.
Published: Nelson, Charles R. and Andrew F. Seigel. "Parsimonious Modeling of Yield Curves," Journal of Business, Vol. 60, No. 3, pp. 473-489, (October 1987).
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