IDEAS home Printed from https://ideas.repec.org/a/eee/econom/v220y2021i2p562-588.html
   My bibliography  Save this article

Estimation of a nonparametric model for bond prices from cross-section and time series information

Author

Listed:
  • Koo, Bonsoo
  • La Vecchia, Davide
  • Linton, Oliver

Abstract

We develop a novel estimation methodology for an additive nonparametric panel model that is suitable for capturing the pricing of coupon-paying government bonds followed over many time periods. We use our model to estimate the discount function and yield curve of nominally riskless government bonds. The novelty of our approach is the combination of two different techniques: cross-sectional nonparametric methods and kernel estimation for time varying dynamics in the time series context. The resulting estimator is used for predicting individual bond prices given the full schedule of their future payments. In addition, it is able to capture the yield curve shapes and dynamics commonly observed in the fixed income markets. We establish the consistency, the rate of convergence, and the asymptotic normality of the proposed estimator. A Monte Carlo exercise illustrates the good performance of the method under different scenarios. We apply our methodology to the daily CRSP bond market dataset, and compare ours with the popular Diebold and Li (2006) method.

Suggested Citation

  • Koo, Bonsoo & La Vecchia, Davide & Linton, Oliver, 2021. "Estimation of a nonparametric model for bond prices from cross-section and time series information," Journal of Econometrics, Elsevier, vol. 220(2), pages 562-588.
    • Handle: RePEc:eee:econom:v:220:y:2021:i:2:p:562-588
    DOI: 10.1016/j.jeconom.2020.04.014
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304407620301330
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jeconom.2020.04.014?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Francis X. Diebold & Monika Piazzesi & Glenn D. Rudebusch, 2005. "Modeling Bond Yields in Finance and Macroeconomics," American Economic Review, American Economic Association, vol. 95(2), pages 415-420, May.
    2. Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," The Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 385-426.
    3. Robert F. Engle & Jose Gonzalo Rangel, 2008. "The Spline-GARCH Model for Low-Frequency Volatility and Its Global Macroeconomic Causes," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1187-1222, May.
    4. Christensen, Jens H.E. & Diebold, Francis X. & Rudebusch, Glenn D., 2011. "The affine arbitrage-free class of Nelson-Siegel term structure models," Journal of Econometrics, Elsevier, vol. 164(1), pages 4-20, September.
    5. Davidson, James, 1994. "Stochastic Limit Theory: An Introduction for Econometricians," OUP Catalogue, Oxford University Press, number 9780198774037, Decembrie.
    6. Chambers, Donald R. & Carleton, Willard T. & Waldman, Donald W., 1984. "A New Approach to Estimation of the Term Structure of Interest Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(3), pages 233-252, September.
    7. Tanggaard, Carsten, 1997. "Nonparametric Smoothing of Yield Curves," Review of Quantitative Finance and Accounting, Springer, vol. 9(3), pages 251-267, October.
    8. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    9. Vasicek, Oldrich A & Fong, H Gifford, 1982. "Term Structure Modeling Using Exponential Splines," Journal of Finance, American Finance Association, vol. 37(2), pages 339-348, May.
    10. Oliver Linton & E. Mammen & J. Nielsen, 1997. "The Existence and Asymptotic Properties of a Backfitting Projection Algorithm Under Weak Conditions," Cowles Foundation Discussion Papers 1160, Cowles Foundation for Research in Economics, Yale University.
    11. Qiang Dai & Kenneth J. Singleton & Wei Yang, 2007. "Regime Shifts in a Dynamic Term Structure Model of U.S. Treasury Bond Yields," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1669-1706, 2007 12.
    12. Ma, Shujie & Linton, Oliver & Gao, Jiti, 2021. "Estimation and inference in semiparametric quantile factor models," Journal of Econometrics, Elsevier, vol. 222(1), pages 295-323.
    13. Connor, Gregory & Korajczyk, Robert A, 1993. "A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, vol. 48(4), pages 1263-1291, September.
    14. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
    15. Michael Vogt & Oliver Linton, 2014. "Nonparametric estimation of a periodic sequence in the presence of a smooth trend," Biometrika, Biometrika Trust, vol. 101(1), pages 121-140.
    16. Christian Gourieroux & Alain Monfort & Vassilis Polimenis, 2002. "Affine Term Structure Models," Working Papers 2002-49, Center for Research in Economics and Statistics.
    17. Wolfgang Karl Härdle,Piotr Majer & Melanie Schienle, 2012. "Yield Curve Modeling and Forecasting using Semiparametric Factor Dynamics," SFB 649 Discussion Papers SFB649DP2012-048, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    18. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
    19. Foucault, Thierry & Pagano, Marco & Roell, Ailsa, 2013. "Market Liquidity: Theory, Evidence, and Policy," OUP Catalogue, Oxford University Press, number 9780199936243, Decembrie.
    20. Hafner, Christian M. & Linton, Oliver, 2010. "Efficient estimation of a multivariate multiplicative volatility model," Journal of Econometrics, Elsevier, vol. 159(1), pages 55-73, November.
    21. Hardle, Wolfgang & Linton, Oliver, 1986. "Applied nonparametric methods," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 38, pages 2295-2339, Elsevier.
    22. Huse, Cristian, 2011. "Term structure modelling with observable state variables," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3240-3252.
    23. Linton, Oliver & Mammen, Enno & Nielsen, Jans Perch & Tanggaard, Carsten, 2001. "Yield curve estimation by kernel smoothing methods," Journal of Econometrics, Elsevier, vol. 105(1), pages 185-223, November.
    24. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    25. Koo, Bonsoo & Linton, Oliver, 2015. "Let’S Get Lade: Robust Estimation Of Semiparametric Multiplicative Volatility Models," Econometric Theory, Cambridge University Press, vol. 31(4), pages 671-702, August.
    26. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
    27. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-830, June.
    28. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    29. Martin M. Andreasen & Jens H. E. Christensen & Glenn D. Rudebusch, 2017. "Term Structure Analysis with Big Data," Working Paper Series 2017-21, Federal Reserve Bank of San Francisco.
    30. Owen A. Lamont & Richard H. Thaler, 2003. "Anomalies: The Law of One Price in Financial Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 191-202, Fall.
    31. Kargin, V. & Onatski, A., 2008. "Curve forecasting by functional autoregression," Journal of Multivariate Analysis, Elsevier, vol. 99(10), pages 2508-2526, November.
    32. Robert R. Bliss, 1996. "Testing term structure estimation methods," FRB Atlanta Working Paper 96-12, Federal Reserve Bank of Atlanta.
    33. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, C.E.P.R. Discussion Papers.
    34. Mark Fisher & Douglas Nychka & David Zervos, 1995. "Fitting the term structure of interest rates with smoothing splines," Finance and Economics Discussion Series 95-1, Board of Governors of the Federal Reserve System (U.S.).
    35. Koo, Bonsoo & Linton, Oliver, 2012. "Estimation of semiparametric locally stationary diffusion models," Journal of Econometrics, Elsevier, vol. 170(1), pages 210-233.
    36. Dahlquist, Magnus & Svensson, Lars E O, 1996. " Estimating the Term Structure of Interest Rates for Monetary Policy Analysis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 163-183, June.
    37. Nymand-Andersen, Per, 2018. "Yield curve modelling and a conceptual framework for estimating yield curves: evidence from the European Central Bank’s yield curves," Statistics Paper Series 27, European Central Bank.
    38. repec:hal:journl:peer-00732539 is not listed on IDEAS
    39. Hardle, Wolfgang & Linton, Oliver, 1986. "Applied nonparametric methods," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 38, pages 2295-2339, Elsevier.
    40. Lee, Jungyoon & Robinson, Peter M., 2016. "Series estimation under cross-sectional dependence," Journal of Econometrics, Elsevier, vol. 190(1), pages 1-17.
    41. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    42. Conley, T. G., 1999. "GMM estimation with cross sectional dependence," Journal of Econometrics, Elsevier, vol. 92(1), pages 1-45, September.
    43. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
    44. Jungyoon Lee & Peter Robinson, 2016. "Series estimation under cross-sectional dependence," LSE Research Online Documents on Economics 63380, London School of Economics and Political Science, LSE Library.
    45. Darrell Duffie & Rui Kan, 1996. "A Yield‐Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406, October.
    46. Yallup, Peter J., 2012. "Models of the yield curve and the curvature of the implied forward rate function," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 121-135.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Frazier, David T. & Koo, Bonsoo, 2021. "Indirect inference for locally stationary models," Journal of Econometrics, Elsevier, vol. 223(1), pages 1-27.
    2. David T. Frazier & Bonsoo Koo, 2020. "Indirect Inference for Locally Stationary Models," Monash Econometrics and Business Statistics Working Papers 30/20, Monash University, Department of Econometrics and Business Statistics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Koo, B. & La Vecchia, D. & Linton, O., 2019. "Nonparametric Recovery of the Yield Curve Evolution from Cross-Section and Time Series Information," Cambridge Working Papers in Economics 1916, Faculty of Economics, University of Cambridge.
    2. Ranik Raaen Wahlstrøm & Florentina Paraschiv & Michael Schürle, 2022. "A Comparative Analysis of Parsimonious Yield Curve Models with Focus on the Nelson-Siegel, Svensson and Bliss Versions," Computational Economics, Springer;Society for Computational Economics, vol. 59(3), pages 967-1004, March.
    3. Faria, Adriano & Almeida, Caio, 2018. "A hybrid spline-based parametric model for the yield curve," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 72-94.
    4. Michiel De Pooter, 2007. "Examining the Nelson-Siegel Class of Term Structure Models," Tinbergen Institute Discussion Papers 07-043/4, Tinbergen Institute.
    5. Tong, Xiaojun & He, Zhuoqiong Chong & Sun, Dongchu, 2018. "Estimating Chinese Treasury yield curves with Bayesian smoothing splines," Econometrics and Statistics, Elsevier, vol. 8(C), pages 94-124.
    6. Rafael Barros de Rezende, 2011. "Giving Flexibility to the Nelson-Siegel Class of Term Structure Models," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(1), pages 27-49.
    7. Michiel De Pooter & Francesco Ravazzolo & Dick van Dijk, 2010. "Term structure forecasting using macro factors and forecast combination," International Finance Discussion Papers 993, Board of Governors of the Federal Reserve System (U.S.).
    8. Glenn D. Rudebusch, 2010. "Macro‐Finance Models Of Interest Rates And The Economy," Manchester School, University of Manchester, vol. 78(s1), pages 25-52, September.
    9. Almeida, Caio & Vicente, José, 2008. "The role of no-arbitrage on forecasting: Lessons from a parametric term structure model," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2695-2705, December.
    10. Poletti Laurini, Márcio & Moura, Marcelo, 2010. "Constrained smoothing B-splines for the term structure of interest rates," Insurance: Mathematics and Economics, Elsevier, vol. 46(2), pages 339-350, April.
    11. Caldeira, João F. & Moura, Guilherme V. & Santos, André A.P., 2016. "Predicting the yield curve using forecast combinations," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 79-98.
    12. Emma Berenguer-Carceles & Ricardo Gimeno & Juan M. Nave, 2012. "Estimation of the Term Structure of Interest Rates: Methodology and Applications," Working Papers 12.06, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
    13. Ioannidis, Christos & Ka, Kook, 2018. "The impact of oil price shocks on the term structure of interest rates," Energy Economics, Elsevier, vol. 72(C), pages 601-620.
    14. Linton, Oliver & Mammen, Enno & Nielsen, Jans Perch & Tanggaard, Carsten, 2001. "Yield curve estimation by kernel smoothing methods," Journal of Econometrics, Elsevier, vol. 105(1), pages 185-223, November.
    15. Gonzalo Cortazar & Eduardo S. Schwartz & Lorenzo F. Naranjo, 2007. "Term-structure estimation in markets with infrequent trading," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(4), pages 353-369.
    16. Lelo de Larrea Alejandra, 2020. "Forecast Comparison of the Term Structure of Interest Rates of Mexico for Different Specifications of the Affine Model," Working Papers 2020-01, Banco de México.
    17. Annaert, Jan & Claes, Anouk G.P. & De Ceuster, Marc J.K. & Zhang, Hairui, 2013. "Estimating the spot rate curve using the Nelson–Siegel model," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 482-496.
    18. Vadim Kaushanskiy & Victor Lapshin, 2016. "A nonparametric method for term structure fitting with automatic smoothing," Applied Economics, Taylor & Francis Journals, vol. 48(58), pages 5654-5666, December.
    19. M�rcio Poletti Laurini, 2014. "Dynamic functional data analysis with non-parametric state space models," Journal of Applied Statistics, Taylor & Francis Journals, vol. 41(1), pages 142-163, January.
    20. Anastasios Demertzidis & Vahidin Jeleskovic, 2021. "Empirical Estimation of Intraday Yield Curves on the Italian Interbank Credit Market e-MID," JRFM, MDPI, vol. 14(5), pages 1-23, May.

    More about this item

    Keywords

    Nonparametric inference; Panel data; Time varying; Yield curve dynamics;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:econom:v:220:y:2021:i:2:p:562-588. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jeconom .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.