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Models of the yield curve and the curvature of the implied forward rate function

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  • Yallup, Peter J.

Abstract

We examine several alternative models of the UK gilt yield curve using daily data for the period 12 July 1996–10 February 2010. We select the best models according to two criteria: low out of sample errors in pricing bonds and low curvature of the implied forward rate curve function. We suggest additions to some of the models that significantly improve their performance. Some of the new models out perform those typically used by the central banks. In particular this paper suggests that the model used by the Canadian Central Bank which both outperforms other models and is particularly easy to estimate, is well suited to the UK gilt market.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:1:p:121-135
    DOI: 10.1016/j.jbankfin.2011.06.010
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    Cited by:

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    2. Antonio Díaz & Francisco Jareño & Eliseo Navarro, 2020. "Yield curves from different bond data sets," Review of Derivatives Research, Springer, vol. 23(2), pages 191-226, July.
    3. Díaz, Antonio & Jareño, Francisco & Navarro, Eliseo, 2018. "Zero-coupon interest rates: Evaluating three alternative datasets," Economics Discussion Papers 2018-67, Kiel Institute for the World Economy (IfW Kiel).
    4. Lajos Horváth & Piotr Kokoszka & Jeremy VanderDoes & Shixuan Wang, 2022. "Inference in functional factor models with applications to yield curves," Journal of Time Series Analysis, Wiley Blackwell, vol. 43(6), pages 872-894, November.
    5. Aryo Sasongko & Cynthia Afriani Utama & Buddi Wibowo & Zaäfri Ananto Husodo, 2019. "Modifying Hybrid Optimisation Algorithms to Construct Spot Term Structure of Interest Rates and Proposing a Standardised Assessment," Computational Economics, Springer;Society for Computational Economics, vol. 54(3), pages 957-1003, October.
    6. Ivailo Arsov & Matthew Brooks & Mitch Kosev, 2013. "New Measures of Australian Corporate Credit Spreads," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 15-26, December.
    7. Butler, Sunil & Kokoszka, Piotr & Miao, Hong & Shang, Han Lin, 2021. "Neural network prediction of crude oil futures using B-splines," Energy Economics, Elsevier, vol. 94(C).
    8. 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.
    9. Emrah Ahi & Vedat Akgiray & Emrah Sener, 2018. "Robust term structure estimation in developed and emerging markets," Annals of Operations Research, Springer, vol. 260(1), pages 23-49, January.

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    More about this item

    Keywords

    Bonds; Yield curve; Forward rate; Discount rate; Curve fitting;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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