Modeling Bond Yields in Finance and Macroeconomics


Francis X. Diebold

Monika Piazzesi

Glenn D. Rudebusch

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2005-04 | January 1, 2005

From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term structure models.

Article Citation

Diebold, Francis X., Glenn D. Rudebusch, and Monika Piazzesi. 2005. “Modeling Bond Yields in Finance and Macroeconomics,” Federal Reserve Bank of San Francisco Working Paper 2005-04. Available at