Hostname: page-component-77c89778f8-n9wrp Total loading time: 0 Render date: 2024-07-24T03:21:03.501Z Has data issue: false hasContentIssue false
  • English
  • Français

A Quantitative Yield Curve Model for Estimating the Term Structure of Interest Rates

Published online by Cambridge University Press:  19 October 2009

Michael E. Echols  and
Jan Walter Elliott
Get access Rights & Permissions [Opens in a new window]

Extract

In this paper, we present a new model for the measurement of yield curve relationships that is derived from interest rate theory, utilizes an objective procedure, and provides measures of the accuracy of the results obtained. In empirical tests of the model, the structure postulated is found to consistently provide a high level of explained variation in observed market yields on U.S. Treasury bonds. In a comparison with a yield curve model previously offered by Cohen et al., the present model is superior in terms of both goodness of fit and other associated statistical criteria. Clear evidence exists that the impact of coupon level upon yield is statistically significant, consistently positive in direction, substantial in magnitude, and variable over time. These results indicate that correction for coupon differences in the calculation of forward rates for use in empirical tests of interest rate theory is necessary in order to obtain reliable results. Finally, the yield curve model is used to calculate estimates of the risk-free pure discount rate.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 1 , March 1976 , pp. 87 - 114
Copyright
Copyright © School of Business Administration, University of Washington 1976

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

Both, University of Wisconsin–Milwaukee. The authors wish to thank Bruce Dangremond, Jerry Baier, and Claire Bartels for their energetic assistance in this project, and the University of Wisconsin-Milwaukee Management Research Center for financial support. Jim Scott provided critical ideas in the project, as did an unnamed referee.

References

REFERENCES

[1] Bartlett, M. S. “Tests of Significance in Factor Analysis.” British Journal of Psychology, Statistical Section, Vol. 3 (1950), pp. 83–95.Google Scholar
[2] Cohen, Kalmon J.; Kramer, Robert L.; and Waugh, W. Howard. “Regression Yield Curves for U.S. Government Securities.” Management Science, Vol. 13, No. 4 (December 1966), pp. 168–175.CrossRefGoogle Scholar
[3] Culbertson, J. M. “The Term Structure of Interest Rates.” Quarterly Journal of Economics, Vol. 71, No. 4 (November 1957), pp. 485–517.CrossRefGoogle Scholar
[4] Durand, David. “Basic Yields of Corporate Bonds, 1900–1942.” Technical Paper 3 (June 1942 ). New York: NBER.Google Scholar
[5] Durand, David. “A Quarterly Series of Corporate Basic Yields, 1952–57, and Some Attendant Reservations.” Journal of Finance, Vol. 13 (September 1958), pp. 348–356.Google Scholar
[6] Durand, David, and Winn, Willis J.. Basic Yields on Bonds, 1926–1947: Their Measurement and Patterns. New York: NBER (1947), pp. 31–40 Addendum.Google Scholar
[7] Farrar, D. E., and Glauber, R. R.. “Multicollinearity in Regression Analysis: The Problem Revisited.” Review of Economics and Statistics, Vol. 49, No. 1 (February 1967), pp. 92–107.CrossRefGoogle Scholar
[8] Fisher, Douglas. “Expectations, the Term Structure of Interest Rates, and Recent British Experience.” Economica, Vol. 33, No. 131 (August 1966), pp. 319–329.CrossRefGoogle Scholar
[9] Fisher, Irving. The Nature of Capital and Income. New York (1906).CrossRefGoogle Scholar
[10] Grant, J. A. G. “Meiselman on the Structure of Interest Rates: A British Test.” Economica, Vol. 31 (February 1964), pp. 58–60.Google Scholar
[11] Haitovsky, Yoel. “Multicollinearity in Regression Analysis: Comment.” The Review of Economics and Statistics, Vol. 51, No. 4 (November 1969), pp. 486–489.CrossRefGoogle Scholar
[12] Hicks, J. R. Value and Capital, 2nd ed. Oxford (1946).Google Scholar
[13] Johnston, J. Econometric Methods, 2nd ed. New York: McGraw-Hill (1972).Google Scholar
[14] Kessel, Rueben A. “The Cyclical Behavior of the Term Structure of Interest Rates.” In Essays on Interest Rates Vol. II, edited by Guttentag, J. M., NBER General Series 93. New York (1971).Google Scholar
[15] Lutz, F. A. “The Structure of Interest Rates.” Quarterly Journal of Economics, Vol. 55 (November 1940), pp. 36–63.CrossRefGoogle Scholar
[16] Macaulay, Frederick R. Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields, and Stock Prices in the United States Since 1856. New York: NBER (1938).Google Scholar
[17] Macaulay, Frederick R. The Movements of Interest Rates, Bond Yields, and Stock Prices in the United States Since 1956. New York: NBER (1958).Google Scholar
[18] Malkiel, Burton G. The Term Structure of Interest Rates. Princeton University Press (1966).Google Scholar
[19] Meiselman, David. The Term Structure of Interest Rates. Princeton University Press (1962).Google Scholar
[20] Nelson, Charles R. The Term Structure of Interest Rates. Princeton University Press (1972).Google Scholar
[21] Pye, Gordon. “On the Tax Structure of Interest Rates.” The Quarterly Journal of Economics, Vol. 83, No. 4 (November 1969), pp. 562–579.CrossRefGoogle Scholar
[22] Rao, Potluri, and Miller, Roger. Applied Econometrics. Wadsworth Publishing Co. (1971).Google Scholar
[23] Roll, Richard. The Behavior of Interest Rates. Princeton University Press (1971).Google Scholar
[24] Roll, Richard. “Investment Diversification and Bond Maturity.” Journal of Finance, Vol. 26 (March 1971), pp. 51–66.CrossRefGoogle Scholar
[25] Treasury Bulletin (U.S. Government Printing Office), various issues, under “Yields of Treasury Securities.”Google Scholar
[26] Van Horne, James. “Interest Rate Risk and the Term Structure of Interest Rates.” Journal of Political Economy, Vol. 73 (August 1965), pp. 344–351.CrossRefGoogle Scholar
[27] Wallace, Neil. “The Term Structure of Interest Rates and the Maturity Composition of the Federal Debt.” Unpublished Ph.D. dissertation submitted to the University of Chicago (December 1964).Google Scholar
[28] Wilks, Sidney. “Certain Generalizations in the Analysis of Variance.” Biometrika, Vol. 24 (1932), pp. 477–493.CrossRefGoogle Scholar
[29] Williams, John B. Theory of Investment Value. Boston (1938), Chapters 10, 20.Google Scholar