Modeling Bond Yields in Finance and Macroeconomics

Diebold, Francis X.; Piazzesi, Monika; Rudebusch, Glenn D.

doi:10.24148/wp2005-04

Working Paper

Modeling Bond Yields in Finance and Macroeconomics

Abstract: 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.

https://doi.org/10.24148/wp2005-04

Status: Published in American Economic Review Papers and Proceedings, v. 95, no. 2 (May 2005) pp. 415-420