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Estimating the Term Structure of Interest Rates

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  • Mark Deacon
  • Andrew Derry
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    Abstract

    This paper examines various techniques used to estimate the term structure of interest rates from the prices of government bonds; in particular comparing the current Bank of England model with two approaches suggested in the academic literature. There are two main aspects of this problem: estimating the relationship between bond yields and maturity, and the relationship between bond yields and coupon. The paper outlines how these problems are approached by the three models, and compares them on both theoretical and practical grounds. It concludes that there is a trade-off between theoretical rigour and practical considerations.

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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1994/wp24.pdf
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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 24.

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    Date of creation: Jul 1994
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    Handle: RePEc:boe:boeewp:24

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    Cited by:
    1. Morini,S., 2003. "Estimación de la curva de tipos cupón-cero con polinomios de Legendre," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 21, pages 363-375, Agosto.
    2. Barr, David & Campbell, John, 1997. "Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices," Scholarly Articles 3163261, Harvard University Department of Economics.
    3. Steeley, James M., 1997. "Implied volatility from the term structure: a simple analytical approximation," Economics Letters, Elsevier, vol. 57(3), pages 345-352, December.
    4. Lin, Bing-Huei & Yeh, Shih-Kuo, 2001. "Estimation for factor models of term structure of interest rates with jumps: the case of the Taiwanese government bond market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(2), pages 167-197, June.
    5. Martin D. D. Evans, 2003. "Real risk, inflation risk, and the term structure," Economic Journal, Royal Economic Society, vol. 113(487), pages 345-389, 04.
    6. Martin Evans, 1998. "Looking Behind the U. K.Term Structure: Were there Peso Problems in Inflation?," Finance 9809001, EconWPA.
    7. Papa M'B. P. N'Diaye & Douglas Laxton, 2002. "Monetary Policy Credibility and the Unemployment-Inflation Tradeoff," IMF Working Papers 02/220, International Monetary Fund.
    8. van Bergeijk, Peter A. G. & Berk, Jan Marc, 2000. "Is the yield curve a useful Information variable for the Eurosystem?," Working Paper Series 0011, European Central Bank.
    9. Jelena Zubkova, 2003. "Interest Rate Term Structure in Latvia in the Monetary Policy Context," Working Papers 2003/03, Latvijas Banka.
    10. J. Huston McCulloch, 2001. "The Inflation Premium implicit in the US Real and Nominal," Computing in Economics and Finance 2001 210, Society for Computational Economics.
    11. J. Huston McCulloch & Levin A. Kochen, 1998. "The Inflation Premium Implicit in the US Real and Nominal Term Structures of Interest Rates," Working Papers 98-12, Ohio State University, Department of Economics.
    12. Lin, Bing-Huei, 1999. "Fitting the term structure of interest rates for Taiwanese government bonds," Journal of Multinational Financial Management, Elsevier, vol. 9(3-4), pages 331-352, November.

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