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The Term Structure of Interest Rates: Estimation and Interpretation

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Author Info

  • Seppälä, Juha

    (Bank of Finland Research)

  • Viertiö, Petri

    (Bank of Finland Research)

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    Abstract

    This document reports the currently used term structure estimation method at the Bank of Finland and discusses interpretation of the results it generates. We start by introducing two widely used term structure estimation methods: the Cubic Spline Function method and the Nelson-Siegel approach. We compare their results, paying special attention to the smoothness of forward interest rates and distribution of pricing errors. Next, we introduce the Bank of Finland's method, commenting on its strengths and weaknesses. Finally, we discuss interpretation of the term structure of interest rates with emphasis on the inflation expectations and the role of the time-varying risk premia.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/DP_19_1996.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 19/1996.

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    Length: 59 pages
    Date of creation: 05 Sep 1996
    Date of revision:
    Handle: RePEc:hhs:bofrdp:1996_019

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: term structure of interest rates; cubic splines; Nelson-Siegel; forward interest rates; relative value; inflation expectations; time-varying risk premia;

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    Cited by:
    1. Luis Eduardo Arango & Andrés González & John Jairo León & Luis Fernando Melo, . "Efectos de los cambios en la tasa de intervención del Banco de la República sobre la estructura a plazo," Borradores de Economia 424, Banco de la Republica de Colombia.
    2. Diego Mauricio Vásquez & Luis Fernando Melo, 2005. "Estimación de la estructura a plazos de las tasas de interés en Colombia por medio del método de funciones B-spline cúbicas," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
    3. Luis Eduardo Arango & Luis Fernando Melo, 2002. "Estimación de la Estructura a Plazo de las Tasas de Interés en Colombia," BORRADORES DE ECONOMIA 002594, BANCO DE LA REPÚBLICA.
    4. Leo Krippner, 2003. "Modelling the Yield Curve with Orthonormalised Laguerre Polynomials: A Consistent Cross-Sectional and Inter-Temporal Approach," Working Papers in Economics 03/02, University of Waikato, Department of Economics.
    5. Juha Ilmari Seppala, 2000. "The Term Structure of Real Interest Rates: Theory and Evidence from the U.K. Index-Linked Bonds," Econometric Society World Congress 2000 Contributed Papers 0245, Econometric Society.
    6. Andraž, Grum, 2006. "Razvitost slovenskega trga dolžniškega kapitala in ocenitev krivulje donosnosti," MPRA Paper 4876, University Library of Munich, Germany.
    7. Leo Krippner, 2005. "An Intertemporally-Consistent and Arbitrage-Free Version of the Nelson and Siegel Class of Yield Curve Models," Working Papers in Economics 05/01, University of Waikato, Department of Economics.
    8. David Jamieson Bolder & Scott Gusba, 2002. "Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada," Working Papers 02-29, Bank of Canada.
    9. Karim Parra, 2010. "Factores determinantes del margen entre la deuda," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
    10. Leo Krippner, 2003. "Modelling the Yield Curve with Orthonomalised Laguerre Polynomials: An Intertemporally Consistent Approach with an Economic Interpretation," Working Papers in Economics 03/01, University of Waikato, Department of Economics.
    11. Gann, Philipp & Laut, Amelie, 2008. "Einflussfaktoren auf den Credit Spread von Unternehmensanleihen," Discussion Papers in Business Administration, University of Munich, Munich School of Management 4231, University of Munich, Munich School of Management.

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