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The Journal of Fixed Income

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Primary Article

Predictability in the Shape of the Term Structure of Interest Rates

Frank J Fabozzi, Lionel Martellini and Philippe Priaulet
The Journal of Fixed Income Summer 2005, 15 (1) 40-53; DOI: https://doi.org/10.3905/jfi.2005.523089
Frank J Fabozzi
The Frederick Frank adjunct professor of finance at the Yale School of Management in New Haven, CT.
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  • For correspondence: fabozzi321@aol.com
Lionel Martellini
A professor of finance at EDHEC Graduate School of Business, Nice-Lille, France, and the scientific director of the EDHEC Risk and Asset Management Research Center.
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  • For correspondence: lionel.martellini@edhec.edu
Philippe Priaulet
A derivatives strategist at HSBC-CCF in Paris and associate professor of mathematics at the University of Evry Val d'Essonne in Evry, France.
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  • For correspondence: philippe.priaulet@ccf.com
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Abstract

Evidence of predictability in the time-varying shape of the U.S. term structure of interest rates is demonstrated using a robust recursive modeling approach based on a Bayesian mixture of multifactor models. Variables such as default spread, equity volatility, and short-term and forward rates can be used to predict changes in the slope of the yield curve and (to a lesser extent) changes in its curvature. Systematic trading strategies based on butterfly swaps reveal that this evidence of predictability in the shape of the yield curve is both statistically and economically significant.

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The Journal of Fixed Income
Vol. 15, Issue 1
Summer 2005
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Predictability in the Shape of the Term Structure of Interest Rates
Frank J Fabozzi, Lionel Martellini, Philippe Priaulet
The Journal of Fixed Income Jun 2005, 15 (1) 40-53; DOI: 10.3905/jfi.2005.523089

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Predictability in the Shape of the Term Structure of Interest Rates
Frank J Fabozzi, Lionel Martellini, Philippe Priaulet
The Journal of Fixed Income Jun 2005, 15 (1) 40-53; DOI: 10.3905/jfi.2005.523089
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