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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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Web page: http://www.bank-banque-canada.ca/

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

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References

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  1. Andrew Jeffrey & Oliver Linton & Thong Nguyen, 2001. "Flexible Term Structure Estimation: Which Method Is Preferred?," Yale School of Management Working Papers ysm171, Yale School of Management, revised 01 Oct 2001.
  2. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," Working Paper 97-10, Federal Reserve Bank of Atlanta.
  3. 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.
  4. 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.
  5. Mark Fisher, 2001. "Forces that shape the yield curve: Parts 1 and 2," Working Paper 2001-3, Federal Reserve Bank of Atlanta.
  6. Robert R. Bliss, 1996. "Testing term structure estimation methods," Working Paper 96-12, Federal Reserve Bank of Atlanta.
  7. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
  8. Shea, Gary S, 1985. " Interest Rate Term Structure Estimation with Exponential Splines: A Note," Journal of Finance, American Finance Association, vol. 40(1), pages 319-25, March.
  9. Bolder, David & Streliski, David, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports 84, Bank of Canada.
  10. Seppälä, Juha & Viertiö, Petri, 1996. "The Term Structure of Interest Rates: Estimation and Interpretation," Research Discussion Papers 19/1996, Bank of Finland.
  11. repec:wop:humbsf:1999-54 is not listed on IDEAS
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Citations

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Cited by:
  1. Marcello Pericoli, 2012. "Real term structure and inflation compensation in the euro area," Temi di discussione (Economic working papers) 841, Bank of Italy, Economic Research and International Relations Area.
  2. Christensen, Ian & Frédéric Dion & Christopher Reid, 2004. "Real Return Bonds, Inflation Expectations, and the Break-Even Inflation Rate," Working Papers 04-43, Bank of Canada.
  3. David Bolder & Shudan Liu, 2007. "Examining Simple Joint Macroeconomic and Term-Structure Models: A Practitioner's Perspective," Working Papers 07-49, Bank of Canada.
  4. Wong, Edwin & Lucia, Kathlyn & Price, Stephanie & Startz, Richard, 2011. "The changing relation between the Canadian and U.S. yield curves," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 965-981, October.
  5. Daniel Vela, 2013. "Forecasting Latin-American yield curves: An artificial neural network approach," BORRADORES DE ECONOMIA 010502, BANCO DE LA REPÚBLICA.
  6. David Jamieson Bolder, 2006. "Modelling Term-Structure Dynamics for Risk Management: A Practitioner's Perspective," Working Papers 06-48, Bank of Canada.
  7. David J. Bolder & Grahame Johnson & Adam Metzler, 2004. "An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates," Working Papers 04-48, Bank of Canada.
  8. 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.
  9. René Garcia & Richard Luger, 2007. "The Canadian macroeconomy and the yield curve: an equilibrium-based approach," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 561-583, May.
  10. 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.
  11. Hans-Jürg Büttler, 2007. "An Orthogonal Polynomial Approach to Estimate the Term Structure of Interest Rates," Working Papers 2007-08, Swiss National Bank.
  12. C. Emre Alper & Aras Akdemir & Kazim Kazimov, 2004. "Estimating the Term Structure of Government Securities in Turkey," Working Papers 2004/03, Bogazici University, Department of Economics.
  13. Daniel Vela, 2013. "Forecasting Latin-American yield curves: An artificial neural network approach," Borradores de Economia 761, Banco de la Republica de Colombia.
  14. Lange, Ronald H., 2013. "The Canadian macroeconomy and the yield curve: A dynamic latent factor approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 261-274.
  15. David Jamieson Bolder & Yuliya Romanyuk, 2008. "Combining Canadian Interest-Rate Forecasts," Working Papers 08-34, Bank of Canada.

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