Modelling the yield curve: A two components approach

Arbeitspapier

Using parametric return autocorrelation tests and non parametric variance ratio statistics show that the UK and US short-term interest rates are unit root processes with significant mean reverting components. Congruent with this empirical evidence, we develop a new continuous time term structure model which assumes that the dynamics of the instantaneous interest rate are given by the joint effect of a (stationary) mean reverting component and a (nonstationary) martingale component. We provide a closed-form solution for the equilibrium yield curve when the temporary component is modelled as an Ornstein-Uhlenbeck process and the permanent component is modelled as an Arithmetic Brownian motion process.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 519

Classification and Topics

• Classification: Wirtschaft ; Single Equation Models; Single Variables: General ; Interest Rates: Determination, Term Structure, and Effects ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Term structure, Mean reversion, Random walk, Brownian motion, Variance ratio, Linear regression ; Zinsstruktur ; Stochastischer Prozess ; Regression ; Schätzung ; Großbritannien ; USA ; Mean Reversion ; Random Walk

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hatgioannides, John ; Karanasos, Menelaos ; Karanassou, Marika
• Event: Veröffentlichung
• (who): Queen Mary University of London, Department of Economics
• (where): London
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/62847
• Last update: 10.03.2025, 11:45 AM CET