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Computing maximally smooth forward rate curves for coupon bonds: An iterative piecewise quartic polynomial interpolation method

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Author Info

  • Paul Beaumont

    ()
    (Department of Economics, Florida State University Author-X-Name-First: Yaniv)

  • Yaniv Jerassy-Etzion

    ()
    (Department of Economics and Management; Ruppin Academic Center)

Abstract

We present a simple and fast iterative, linear algorithm for simultaneously stripping the coupon payments from and smoothing the yield curve of the term structure of interest rates. The method minimizes pricing errors, constrains initial and terminal conditions of the curves and produces maximally smooth forward rate curves.

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File URL: ftp://econpapers.fsu.edu/RePEc/fsu/wpaper/wp2011_08_03.pdf
File Function: First version, 2011-08
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Bibliographic Info

Paper provided by Department of Economics, Florida State University in its series Working Papers with number wp2011_08_03.

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Length: 25 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:fsu:wpaper:wp2011_08_03

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Keywords: Term structure of interest rates; yield curve; coupon stripping; curve interpolation;

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  1. Patrick Hagan & Graeme West, 2006. "Interpolation Methods for Curve Construction," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(2), pages 89-129.
  2. 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.
  3. Diebold, Francis X. & Li, Canlin, 2003. "Forecasting the term structure of government bond yields," CFS Working Paper Series 2004/09, Center for Financial Studies (CFS).
  4. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June.
  5. Ricardo Gimeno & Juan M. Nave, 2006. "Genetic algorithm estimation of interest rate term structure," Banco de Espa�a Working Papers 0634, Banco de Espa�a.
  6. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
  7. Mark Fisher, 2004. "Modeling the term structure of interest rates: an introduction," Economic Review, Federal Reserve Bank of Atlanta, issue Q 3, pages 41-62.
  8. Jordan, James V. & Mansi, Sattar A., 2003. "Term structure estimation from on-the-run Treasuries," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1487-1509, August.
  9. Vasicek, Oldrich A & Fong, H Gifford, 1982. " Term Structure Modeling Using Exponential Splines," Journal of Finance, American Finance Association, vol. 37(2), pages 339-48, May.
  10. Julian Manzano & Jorgen Blomvall, 2004. "Positive forward rates in the maximum smoothness framework," Quantitative Finance, Taylor & Francis Journals, vol. 4(2), pages 221-232.
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