NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Time-Varying Volatility and the Dynamic Behavior of the Term Structure

Robert F. Engle, Victor K. Ng

NBER Working Paper No. 3682
Issued in April 1991
NBER Program(s):   ME

In this paper, we consider a framework with which the cross sectional and time series behavior of the yield curve can be studied simultaneously. We examine the relationship between the yield curve and the time-varying conditional volatility of the Treasury bill market. We demonstrate that differently shaped yield curves can result given different combinations of volatility and expectations about future spot rates. Moreover, adjusting the forward rate for the volatility related liquidity premium can improve its performance as a predictor of future spot rates at least for the period from August 1964 to August 1979.

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Document Object Identifier (DOI): 10.3386/w3682

Published: Journal of Money, Credit and Banking, 1993, vol. 25, issue 3, pages 336-49. citation courtesy of

 
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