TY - JOUR
AU - Balduzzi, Pierluigi
AU - Das, Sanjiv Ranjan
AU - Foresi, Silverio
TI - The Central Tendency: A Second Factor in Bond Yields
JF - National Bureau of Economic Research Working Paper Series
VL - No. 6325
PY - 1997
Y2 - December 1997
DO - 10.3386/w6325
UR - http://www.nber.org/papers/w6325
L1 - http://www.nber.org/papers/w6325.pdf
N1 - Author contact info:
Pierluigi Balduzzi
Carroll School of Management
Boston College
330B Fulton Hall
140 Commonwealth Avenue
Chestnut Hill, MA 02467
Tel: 617/552-3976
Fax: 617/552-3985
E-Mail: pierluigi.balduzzi@bc.edu
Sanjiv Das
Dept. of Finance
Santa Clara University
321E Lucas Hall, 500 El Camino Real
Santa Clara, CA 95053
E-Mail: srdas@scu.edu
Silverio Foresi
Salomon Smith Barney
Emerging Markets Derivatives and
Structured Products
388 Greenwich Street
11th Floor
New York, NY 10013
AB - We assume that the instantaneous riskless rate reverts towards a central tendency which in turn, is changing stochastically over time. As a result, current short-term rates are not" sufficient to predict future short-term rates movements, as would be the case if the central" tendency was constant. However, since longer-maturity bond prices incorporate information" about the central tendency, longer-maturity bond yields can be used to predict future short-term" rate movements. We develop a two-factor model of the term-structure which implies that a" linear combination of any two rates can be used as a proxy for the central tendency. Based on" this central-tendency proxy, we estimate a model of the one-month rate which performs better" than models which assume the central tendency to be constant.
ER -