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Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada

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  • David Jamieson Bolder
  • Scott Gusba

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp02-29.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 02-29.

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Length: 90 pages Abstract: This paper continues the work started by Bolder and Stréliski (1999) and considers two alternative classes of models for extracting zero-coupon and forward rates from a set of observed Government of Canada bond and treasury-bill prices. The first class of term-structure estimation methods follows from work by Fisher, Nychka, and Zervos (1994), Anderson and Sleath (2001), and Waggoner (1997). This approach employs a B-spline basis for the space of cubic splines to fit observed coupon-bond prices—as a consequence, we call these the spline-based models. This approach includes a penalty in the generalized least-squares objective function—following from Waggoner (1997)—that imposes the desired level of smoothness into the term structure of interest rates. The second class of methods is called function-based and includes variations on the work of Li et al. (2001), which uses linear combinations of basis functions, defined over the entire term-to-maturity spectrum, to fit the discount function. This class of function-based models includes the model proposed by Svensson (1994). In addition to a comprehensive discussion of these models, the authors perform an extensive comparison of these models' performance in the Canadian marketplace.
Date of creation: 2002
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Handle: RePEc:bca:bocawp:02-29

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Keywords: Interest rates; Econometric and statistical methods; Financial markets;

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References

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  1. 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.
  2. Andrew Jeffrey & Oliver Linton & Thong Nguyen, 2006. "Flexible Term Structure Estimation: Which Method is Preferred?," Metrika, Springer, Springer, vol. 63(1), pages 99-122, February.
  3. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," Working Paper, Federal Reserve Bank of Atlanta 97-10, Federal Reserve Bank of Atlanta.
  4. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
  5. Mark Fisher, 2001. "Forces that shape the yield curve: Parts 1 and 2," Working Paper, Federal Reserve Bank of Atlanta 2001-3, Federal Reserve Bank of Atlanta.
  6. Bolder, David & Streliski, David, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports, Bank of Canada 84, Bank of Canada.
  7. Seppälä, Juha & Viertiö, Petri, 1996. "The Term Structure of Interest Rates: Estimation and Interpretation," Research Discussion Papers 19/1996, Bank of Finland.
  8. 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.
  9. Shea, Gary S, 1985. " Interest Rate Term Structure Estimation with Exponential Splines: A Note," Journal of Finance, American Finance Association, American Finance Association, vol. 40(1), pages 319-25, March.
  10. Robert R. Bliss, 1996. "Testing term structure estimation methods," Working Paper, Federal Reserve Bank of Atlanta 96-12, Federal Reserve Bank of Atlanta.
  11. repec:wop:humbsf:1999-54 is not listed on IDEAS
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Citations

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Cited by:
  1. René Garcia & Richard Luger, 2005. "The Canadian Macroeconomy and the Yield Curve: An Equilibrium-Based Approach," Working Papers, Bank of Canada 05-36, Bank of Canada.
  2. Marcello Pericoli, 2012. "Real term structure and inflation compensation in the euro area," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 841, Bank of Italy, Economic Research and International Relations Area.
  3. Kathlyn Lucia & Stephanie Price & Edwin Wong & Richard Startz, 2008. "The Changing Relation Between the Canadian and U.S. Yield Curves," Working Papers, University of Washington, Department of Economics UWEC-2008-05, University of Washington, Department of Economics.
  4. Christensen, Ian & Frédéric Dion & Christopher Reid, 2004. "Real Return Bonds, Inflation Expectations, and the Break-Even Inflation Rate," Working Papers, Bank of Canada 04-43, Bank of Canada.
  5. Daniel Vela, 2013. "Forecasting Latin-American yield curves: An artificial neural network approach," Borradores de Economia 761, Banco de la Republica de Colombia.
  6. David J. Bolder & Grahame Johnson & Adam Metzler, 2004. "An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates," Working Papers, Bank of Canada 04-48, Bank of Canada.
  7. Daniel Vela, 2013. "Forecasting Latin-American yield curves: An artificial neural network approach," BORRADORES DE ECONOMIA 010502, BANCO DE LA REPÚBLICA.
  8. David Jamieson Bolder, 2006. "Modelling Term-Structure Dynamics for Risk Management: A Practitioner's Perspective," Working Papers, Bank of Canada 06-48, Bank of Canada.
  9. 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.
  10. David Jamieson Bolder & Yuliya Romanyuk, 2008. "Combining Canadian Interest-Rate Forecasts," Working Papers, Bank of Canada 08-34, Bank of Canada.
  11. C. Emre Alper & Aras Akdemir & Kazim Kazimov, 2004. "Estimating the Term Structure of Government Securities in Turkey," Working Papers, Bogazici University, Department of Economics 2004/03, Bogazici University, Department of Economics.
  12. Hana Hladíková & Jarmila Radová, 2012. "Term Structure Modelling by Using Nelson-Siegel Model," European Financial and Accounting Journal, University of Economics, Prague, vol. 2012(2), pages 36-55.
  13. David Bolder & Shudan Liu, 2007. "Examining Simple Joint Macroeconomic and Term-Structure Models: A Practitioner's Perspective," Working Papers, Bank of Canada 07-49, Bank of Canada.
  14. Hans-Jürg Büttler, 2007. "An Orthogonal Polynomial Approach to Estimate the Term Structure of Interest Rates," Working Papers 2007-08, Swiss National Bank.
  15. Lange, Ronald H., 2013. "The Canadian macroeconomy and the yield curve: A dynamic latent factor approach," International Review of Economics & Finance, Elsevier, Elsevier, vol. 27(C), pages 261-274.

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