Finance and Economics Discussion Series (FEDS)
December 2011
An Arbitrage-Free Three-Factor Term Structure Model and the Recent Behavior of Long-Term Yields and Distant-Horizon Forward Rates
Don H. Kim and Jonathan H. Wright
Data - Excel file (CSV) | Data - Screen readerAbstract:
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.
Note: On November 5, 2019, the location of this data changed. The new files, updated weekly, and FAQs can be found at “Three-Factor Nominal Term Structure Model.” A version of the data before November 5 can be found here.
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Data - Excel file (3.3 MB XLS) | Data - Screen reader
Keywords: Forward rates, term-structure model, arbitrage-free pricing, term premiums
PDF: Full Paper
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