Yield Curve Models

Abstract

This chapter provides a basic overview of the three types of yield curve models known as regression-type models, empirical models, and equilibrium models. In Section 3.1 various regression-type models are discussed. Regression modeling is the most traditional method of fitting a yield curve, where a function is simply fitted to the yields to maturity of regular coupon-paying bonds. The fitted curve is considered to be a par yield curve, which can be converted to a zero curve by using the methods described in Chapter 2. One of the main problems with the regression-type models is that the ”coupon effect” is not taken into account. The coupon effect refers to the fact that different bonds with the same term to maturity may have very different yields to maturity because of differences in their coupon rates.