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Yield Curve Estimation by Kernel Smoothing Methods

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Author Info
Oliver B. Linton (London School of Economics)
Enno Mammen (Ruprecht-Karls Universitat Heidelberg)
J. Nielsen (Codan)
Carsten Tanggaard (Aarhus School of Business)

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Abstract

We introduce a new method for the estimation of discount functions, yield curves and forward curves from government issued coupon bonds. Our approach is nonparametric and does not assume a particular functional form for the discount function although we do show how to impose various restrictions in the estimation. Our method is based on kernel smoothing and is defined as the minimum of some localized population moment condition. The solution to the sample problem is not explicit and our estimation procedure is iterative, rather like the backfitting method of estimating additive nonparametric models. We establish the asymptotic normality of our methods using the asymptotic representation of our estimator as an infinite series with declining coefficients. The rate of convergence is standard for one dimensional nonparametric regression. We investigate the finite sample performance of our method, in comparison with other well-established methods, in a small simulation experiment.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0235.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0235

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robinson, Peter M, 1988. "The Stochastic Difference between Econometric Statistics," Econometrica, Econometric Society, vol. 56(3), pages 531-48, May. [Downloadable!] (restricted)
  2. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January. [Downloadable!] (restricted)
  3. Jordan, James V, 1984. " Tax Effects in Term Structure Estimation," Journal of Finance, American Finance Association, vol. 39(2), pages 393-406, June. [Downloadable!] (restricted)
  4. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 495-514, May. [Downloadable!] (restricted)
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  5. Oliver Linton & Enno Mammen & N Nielsen, 2000. "The Existence and Asymptotic Properties of a Backfitting Projection Algorithm under Weak Conditions," STICERD - Econometrics Paper Series /2000/386, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
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  6. Tanggaard, Carsten, 1997. " Nonparametric Smoothing of Yield Curves," Review of Quantitative Finance and Accounting, Springer, vol. 9(3), pages 251-67, October. [Downloadable!] (restricted)
  7. W. H"Ardle & O. Linton, . "Nonparametric Regression," Sonderforschungsbereich 373 1995-29, Humboldt Universitaet Berlin.
  8. Andrew Chesher, 1997. "Diet Revealed?: Semiparametric Estimation of Nutrient Intake-Age Relationships," Journal Of The Royal Statistical Society Series A, Royal Statistical Society, vol. 160(3), pages 389-428. [Downloadable!] (restricted)
  9. Conley, T. G., 1999. "GMM estimation with cross sectional dependence," Journal of Econometrics, Elsevier, vol. 92(1), pages 1-45, September. [Downloadable!] (restricted)
  10. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January. [Downloadable!] (restricted)
  11. Mark Fisher & Douglas Nychka & David Zervos, 1995. "Fitting the term structure of interest rates with smoothing splines," Finance and Economics Discussion Series 95-1, Board of Governors of the Federal Reserve System (U.S.).
  12. John Rust, 1997. "Using Randomization to Break the Curse of Dimensionality," Econometrica, Econometric Society, vol. 65(3), pages 487-516, May.
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  13. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(4), pages 573-92. [Downloadable!] (restricted)
  14. Hausman, Jerry A & Newey, Whitney K, 1995. "Nonparametric Estimation of Exact Consumers Surplus and Deadweight Loss," Econometrica, Econometric Society, vol. 63(6), pages 1445-76, November. [Downloadable!] (restricted)
  15. Frankel, Jeffrey A & Lown, Cara S, 1994. "An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve along Its Entire Length," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 517-30, May. [Downloadable!] (restricted)
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  16. Dahlquist, Magnus & Svensson, Lars E O, 1996. " Estimating the Term Structure of Interest Rates for Monetary Policy Analysis," Scandinavian Journal of Economics, Blackwell Publishing, vol. 98(2), pages 163-83, June.
  17. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Thomas A. Severini & Gautam Tripathi, 2005. "Some Identification Issues in Nonparametric Linear Models with Endogenous Regressors," Working papers 2005-12, University of Connecticut, Department of Economics. [Downloadable!]
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