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Financial Markets and Portfolio Management

, Volume 30, Issue 2, pp 205–228 | Cite as

A plausible model of yield curve dynamics

  • Gideon MagnusEmail author
Article
  • 160 Downloads

Abstract

We present a simple model of yield curve dynamics which satisfies key criteria of plausibility. Specifically, yields are non-negative and the Sharpe ratio of a mean-variance optimal bond portfolio has a reasonable magnitude. The model matches stylized data features, in particular long-run moments of yields and excess returns.

Keywords

Term structure modeling Sharpe ratios  

JEL Classification

E43 G12 

Notes

Acknowledgments

I am grateful to the editor Markus Schmid and two anonymous referees, and also to Patrick Caldon, Ralph Koijen, and Harald Uhlig for helpful and constructive comments. Jing Cynthia Wu was kind enough to answer my questions about the code in Bauer et al. (2012), enabling the comparison in Sect. 5.

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Copyright information

© Swiss Society for Financial Market Research 2016

Authors and Affiliations

  1. 1.Morningstar, Inc.ChicagoUSA

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