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Yield curve estimation by kernel smoothing methods

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  • Linton, Oliver
  • Mammen, Enno
  • Nielsen, Jans Perch
  • Tanggaard, Carsten

Abstract

We introduce a new method for the estimation of discount functions, yield curves and forward curves from government issued coupon bonds. Our approach is nonparametric and does not assume a particular functional form for the discount function although we do show how to impose various restrictions in the estimation. Our method is based on kernel smoothing and is defined as the minimum of some localized population moment condition. The solution to the sample problem is not explicit and our estimation procedure is iterative, rather like the backfitting method of estimating additive nonparametric models. We establish the asymptotic normality of our methods using the asymptotic representation of our estimator as an infinite series with declining coefficients. The rate of convergence is standard for one dimensional nonparametric regression. We investigate the finite sample performance of our method, in comparison with other well-established methods, in a small simulation experiment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 105 (2001)
Issue (Month): 1 (November)
Pages: 185-223

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Handle: RePEc:eee:econom:v:105:y:2001:i:1:p:185-223

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Web page: http://www.elsevier.com/locate/jeconom

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Citations

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Cited by:
  1. Oliver Linton & Andrew Jeffrey & Thong Nguyen, 2001. "Flexible Term Structure Estimation: Which Method is Preferred?," FMG Discussion Papers dp385, Financial Markets Group.
  2. Laurini, Márcio Poletti & Hotta, Luiz Koodi, 2010. "Bayesian extensions to Diebold-Li term structure model," International Review of Financial Analysis, Elsevier, vol. 19(5), pages 342-350, December.
  3. Xiaohong Chen & Oliver Linton & Ingrid Van Keilegom, 2003. "Estimation of Semiparametric Models when the Criterion Function is not Smooth," STICERD - Econometrics Paper Series /2003/450, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  4. Ivailo Arsov & Matthew Brooks & Mitch Kosev, 2013. "New Measures of Australian Corporate Credit Spreads," RBA Bulletin, Reserve Bank of Australia, pages 15-26, December.
  5. Tatyana Krivobokova & Göran Kauermann & Theofanis Archontakis, 2006. "Estimating the term structure of interest rates using penalized splines," Statistical Papers, Springer, vol. 47(3), pages 443-459, June.
  6. Severini, Thomas A. & Tripathi, Gautam, 2006. "Some Identification Issues In Nonparametric Linear Models With Endogenous Regressors," Econometric Theory, Cambridge University Press, vol. 22(02), pages 258-278, April.
  7. Michiel De Pooter, 2007. "Examining the Nelson-Siegel Class of Term Structure Models," Tinbergen Institute Discussion Papers 07-043/4, Tinbergen Institute.
  8. Fengler, Matthias R. & Härdle, Wolfgang & Mammen, Enno, 2003. "Implied volatility string dynamics," SFB 373 Discussion Papers 2003,54, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  9. Enno Mammen & Byeong U. Park & Melanie Schienle, 2012. "Additive Models: Extensions and Related Models," SFB 649 Discussion Papers SFB649DP2012-045, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  10. David Jamieson Bolder & Scott Gusba, 2002. "Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada," Working Papers 02-29, Bank of Canada.

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