2
$\begingroup$

Doing some yield curve forecasting and unsure whether should be working with yield or change of yield.

$\endgroup$
  • $\begingroup$ Typically it is considered stationary and mean reverting. Yield curve analysis can be done on either level or returns since, for example, correlations on levels are explainable. $\endgroup$ – Kch Apr 19 '18 at 17:42
  • $\begingroup$ There was actually a good answer on here saying that it is non-stationary because its variance is changing. If empirically it has been indeed observed that variance (or mean) of say Gaussian change through time -- then indeed it would be a non-stationary process. Having thought about it more, there are interest rate models. I think all of them assume nonstationarity (just like geometric brownian motion for equities). So price and yield both seem to be non-stationary processes, hence requiring looking at relative change (which at least resembles more of a stationary process). $\endgroup$ – A.L. Verminburger Apr 19 '18 at 21:48
2
$\begingroup$

Following Meucci (Risk and Asset Allocation book, page 112-113) you should use "change of yield to maturity" (simple change, not percentage) since they represent Fixed Income´s invariant. Change of yield to maturity would be the equivalent to change in price (in ln terms) for equities.

$\endgroup$
  • $\begingroup$ Don't see how relative change and percentage are any different, but do appreciate the reference. $\endgroup$ – A.L. Verminburger Apr 20 '18 at 15:20

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.