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Two Factors along the Yield Curve

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  • Gong, Fangxiong
  • Remolona, Eli M

Abstract

Are all two-factor, term-structure models the same? The authors specify three models and estimate each on different parts of the U.S. yield curve. The exercise provides insights on reconciling the term structure's time series with its cross section and on relating it to fundamentals. The authors' evidence favors models where one factor reverts to a time-varying mean. One such model explains shorter-term yields and another longer-term yields. The models differ primarily because mean reversion is much faster near the yield curve's short end than near its long end. The factors seem to capture mean reversion in inflation and the Fed's target rate. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Gong, Fangxiong & Remolona, Eli M, 1997. "Two Factors along the Yield Curve," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(0), pages 1-31, Supplemen.
    • Handle: RePEc:bla:manch2:v:65:y:1997:i:0:p:1-31
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    Cited by:

    1. Peter Smith & Michael Wickens, 2002. "Asset Pricing with Observable Stochastic Discount Factors," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 397-446, July.
    2. Cassola, N. & Luis, J.B., 2001. "A Two-Factor Model of the German Term Structure of Interest Rates," Papers 46, Quebec a Montreal - Recherche en gestion.
    3. Dong Heon Kim, 2004. "Nonlinearity in the Term Structure," Econometric Society 2004 Far Eastern Meetings 440, Econometric Society.
    4. Michael J. Fleming & Eli M. Remolona, 1999. "The term structure of announcement effects," Staff Reports 76, Federal Reserve Bank of New York.
    5. Hiona Balfoussia & Mike Wickens, 2007. "Macroeconomic Sources of Risk in the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 205-236, February.
    6. R.C. Stapleton & Marti G. Subrahmanyam, 1999. "The Term Structure of Interest Rate-Futures Prices," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-045, New York University, Leonard N. Stern School of Business-.
    7. D H Kim, 2005. "Nonlinearity in the Term Structure," Centre for Growth and Business Cycle Research Discussion Paper Series 51, Economics, The University of Manchester.
    8. Somvang PHIMMAVONG & Ian FERGUSON & Barbara OZARSKA, 2010. "Economy-Wide Impact of Forest Plantation Development in Laos Using a Dynamic General Equilibrium Approach," EcoMod2010 259600131, EcoMod.
    9. D H Kim, 2004. "Nonlinearity in the Term Structure," Economics Discussion Paper Series 0401, Economics, The University of Manchester.
    10. Barros Luís, Jorge & Cassola, Nuno, 2001. "A two-factor model of the German term structure of interest rates," Working Paper Series 0046, European Central Bank.
    11. Peter Spencer, 2004. "Affine Macroeconomic Models of the Term Structure of Interest Rates: The US Treasury Market 1961-99," Discussion Papers 04/16, Department of Economics, University of York, revised Jan 2006.
    12. Ben Fung & Scott Mitnick & Eli Remolona, 1999. "Uncovering Inflation Expectations and Risk Premiums From Internationally Integrated Financial Markets," Staff Working Papers 99-6, Bank of Canada.
    13. Fendel, Ralf, 2004. "Towards a Joint Characterization of Monetary Policy and the Dynamics of the Term Structure of Interest Rates," Discussion Paper Series 1: Economic Studies 2004,24, Deutsche Bundesbank.
    14. Lekkos, Ilias, 2007. "Modelling multiple term structures of defaultable bonds with common and idiosyncratic state variables," Journal of Empirical Finance, Elsevier, vol. 14(5), pages 783-817, December.

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