Hello everyone, When trying to construct an interest rate model to value US treasuries and agencies, what time series would be the ideal choice as a proxy for daily historical interest rates? The constant maturity series from the US Federal Reserve, a series of zero-coupon yields, etc? Thanks in advance.
Probably depends on what you are trying to do. If you are trying to fit some term-structure model to find mispricings on treasuries, this is an impossible way of making money.
I am trying to create a term-structure model that serves as a reasonable represenation of interest rate volatility as far as duration risk management is concerned.
Are you aware of the enormous body of literature on term-structure models? Like are you calibrating an HJM model? I guess the answer is that term-structure model calibration is tricky and depends a lot on what you’re doing with the model (e.g., it’s completely different for VaR and derivative pricing). Anyway, the key to all these is estimating forward rate vol which means somewhere along the line you are going to want zero-coupon rates.