Comparative Analysis of Zero Coupon Yield Curve Estimation Methods Using JGB Price Data
AbstractThis paper conducts a comparative analysis of the diverse methods for estimating the Japanese government bond (JGB) zero coupon yield curve (hereafter, zero curve) according to the criteria that estimation methods should meet. Previous studies propose many methods for estimating the zero curve from the market prices of coupon-bearing bonds. In estimating the JGB zero curve, however, an undesirable method may fail to accurately grasp the features of the zero curve. In order to select an appropriate estimation method for the JGB, we set the following criteria for the zero curve: (1) estimates should not fall below zero, (2) estimates should not take abnormal values, (3) estimates should have a good fit to market prices, and (4) the zero curve should have little unevenness. The method which meets these criteria enables us to estimate the zero curve with a good fit to the JGB market prices and a proper interpolation to grasp the features of the zero curve. Based on our analysis, we conclude that the method proposed in Steeley  is the best in light of the criteria for the JGB price data. In fact, the zero curve based on this method can fully capture the characteristics of the JGB zero curve in a prolonged period of accommodative monetary policy.
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Bibliographic InfoPaper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 12-E-04.
Date of creation: Apr 2012
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coupon-bearing government bond; zero coupon yield; piecewise polynomial function;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-02 (All new papers)
- NEP-CBA-2012-05-02 (Central Banking)
- NEP-FMK-2012-05-02 (Financial Markets)
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- Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," Working Paper 97-10, Federal Reserve Bank of Atlanta.
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