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Federal Reserve Bank of San Francisco
Working Paper Series
Modeling bond yields in finance and macroeconomics
Francis X. Diebold
Monika Piazzesi
Glenn D. Rudebusch

From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term structure models.

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Francis X. Diebold & Monika Piazzesi & Glenn D. Rudebusch, Modeling bond yields in finance and macroeconomics, Federal Reserve Bank of San Francisco, Working Paper Series 2005-04, 2005.
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Keywords: Bonds ; Macroeconomics ; Finance ; Econometric models
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