This paper explores the hypothesis that the returns of asset classes can be predicted using common, systematic risk factors represented by the level, slope, and curvature of the US interest rate term structure. These are extracted using the Nelson-Siegel model, which effectively captures the...

Variations over time in mortgage yield spreads should reflect changes in the underlying prepayment option value; moreover, the relationship between mortgage yield spreads and interest rate dynamics should weaken as the value of the borrower’s prepayment option declines. We verify this...