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Exact Smooth Term Structure Estimation

Author

Listed:
  • Damir Filipović

    (Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute)

  • Sander Willems

    (Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute)

Abstract

We introduce a novel method to estimate the discount curve from market quotes based on the Moore-Penrose pseudoinverse such that 1) the market quotes are exactly replicated, 2) the curve has maximal smoothness, 3) no ad hoc interpolation is needed, and 4) no numerical root-finding algorithms are required. We provide a full theoretical framework as well as practical applications for both single-curve and multi-curve estimation.

Suggested Citation

  • Damir Filipović & Sander Willems, 2016. "Exact Smooth Term Structure Estimation," Swiss Finance Institute Research Paper Series 16-38, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1638
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    References listed on IDEAS

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    1. Shea, Gary S., 1984. "Pitfalls in Smoothing Interest Rate Term Structure Data: Equilibrium Models and Spline Approximations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(3), pages 253-269, September.
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    16. Poletti Laurini, Márcio & Moura, Marcelo, 2010. "Constrained smoothing B-splines for the term structure of interest rates," Insurance: Mathematics and Economics, Elsevier, vol. 46(2), pages 339-350, April.
    17. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-830, June.
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    Cited by:

    1. Martin M. Andreasen & Jens H. E. Christensen & Glenn D. Rudebusch, 2017. "Term Structure Analysis with Big Data," Working Paper Series 2017-21, Federal Reserve Bank of San Francisco.

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    More about this item

    Keywords

    Bootstrap; Discount Curve; Forward Curve; Splines; Term Structure Estimation;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • 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

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