An arbitrage-free three-factor term structure model and the recent behavior of long-term yields and distant-horizon forward rates
Abstract: This paper reviews a simple three-factor arbitrage-free term structure model estimated by Federal Reserve Board staff and reports results obtained from fitting this model to U.S. Treasury yields since 1990. The model ascribes a large portion of the decline in long-term yields and distant-horizon forward rates since the middle of 2004 to a fall in term premiums. A variant of the model that incorporates inflation data indicates that about two-thirds of the decline in nominal term premiums owes to a fall in real term premiums, but estimated compensation for inflation risk has diminished as well.
File(s): File format is text/html http://www.federalreserve.gov/pubs/feds/2005/200533/200533abs.html
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/2005/200533/200533pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2005