A Practitioner's Guide to Discrete-Time Yield Curve Modelling (With Empirical Illustrations and MATLAB Examples)
The text is available as an Element on Cambridge University Press DOI: https://doi.org/10.1017/9781108975537
I take a very practical approach and provide information on term stureture modelling and estimation techniques. I cover models that exclude arbitrage oportunities as well as ad-hoc approaches, Data and MATLAB codes used in the text can be downloaded from the above link.
I derive an arbitrage-free four-factor term structure model that facilitates direct parameterization of the short-term interest rate process. The interplay between macroeconomic variables and the term structure via a monetary policy reaction function, in the spirit of Taylor(1993), is therefore directly supported. I show that the proposed model is a constrained member of the canonical GDTSM family proposed by Joslin, Singleton and Zhu(2011). The model's loading structure bears close resemblance to that of the Svensson and Soderlind (1997) model, but it relies only on a single non-linear shape parameter, and the model is therefore easy to estimate. An empirical application to US data covering the period from 1961 to 2017 demonstrates that the proposed model fits yields well, and that an embedded policy rule, including industrial production and the inflation rate, is statistically significant and economically meaningful during this time-period.
The content of this web site is not related to or endorsed by my employer. All views expressed here (if any) are mine alone and are not necessarily shared by my employer.
All materials on this website are provided "as is" and no warranty is given for the correct functioning of e.g. computer codes. Nothing on this website should be seen as indicating investment advice of any kind. MATLAB code and teaching materials can be downloaded and used free of charge as long as re-used materials include proper quoting of the source (i.e. me). Support is not guaranteed (but please do email me if you find bugs or have questions).
Ken Nyholm (c) - Updated August 2019