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Nonparametric Smoothing of Yield Curves

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  • Tanggaard, Carsten

Abstract

This paper proposes a new nonparametric approach to the problem of inferring term structure estimates using coupon bond prices. The nonparametric estimator is defined on the basis of a penalized least squares criterion. The solution is a natural cubic spline, and the paper presents an iterative procedure for solving the non-linear first-order conditions. Besides smoothness, there are no a priori restrictions on the yield curve, and the position of the knots and the optimal smoothness can be determined from data. For these reasons the smoothing procedure is said to be completely data driven. The paper also demonstrates that smoothing a simple transformation of the yield curve greatly improves the stability of longer-term yield curve estimates. Copyright 1997 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 9 (1997)
Issue (Month): 3 (October)
Pages: 251-67

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Handle: RePEc:kap:rqfnac:v:9:y:1997:i:3:p:251-67

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Web page: http://springerlink.metapress.com/link.asp?id=102990

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Cited by:
  1. S. Nielsen, Soren & Poulsen, Rolf, 2004. "A two-factor, stochastic programming model of Danish mortgage-backed securities," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1267-1289, April.
  2. Kentaro Kikuchi & Kohei Shintani, 2012. "Comparative Analysis of Zero Coupon Yield Curve Estimation Methods Using JGB Price Data," IMES Discussion Paper Series 12-E-04, Institute for Monetary and Economic Studies, Bank of Japan.
  3. Leif Andersen, 2007. "Discount curve construction with tension splines," Review of Derivatives Research, Springer, vol. 10(3), pages 227-267, December.
  4. Andraž, Grum, 2006. "Razvitost slovenskega trga dolžniškega kapitala in ocenitev krivulje donosnosti," MPRA Paper 4876, University Library of Munich, Germany.
  5. Oliver Linton & E. Mammen & J. Nielsen & C. Tanggaard, 1998. "Estimating Yield Curves by Kernel Smoothing Methods," Cowles Foundation Discussion Papers 1205, Cowles Foundation for Research in Economics, Yale University.
  6. Abaffy, Jozsef & Bertocchi, Marida & Dupacova, Jitka & Giacometti, Rosella & Huskova, Marie & Moriggia, Vittorio, 2003. "A nonparametric model for analysis of the EURO bond market," Journal of Economic Dynamics and Control, Elsevier, vol. 27(6), pages 1113-1131, April.
  7. Oliver B. Linton & Enno Mammen & J. Nielsen & Carsten Tanggaard, 2000. "Yield Curve Estimation by Kernel Smoothing Methods," Econometric Society World Congress 2000 Contributed Papers 0235, Econometric Society.

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