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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
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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

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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

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