IDEAS home Printed from https://ideas.repec.org/p/uts/wpaper/51.html
   My bibliography  Save this paper

Fitting Parsimonious Yield Curve Models to Australian Coupon Bond Data

Author

Abstract

This study uses a unique data set on Australian coupon bonds to test a number of yield curve models. A non-linear least squares technique is employed to directly fit four alternative, zero coupon, forward rate, yield curve models to the data. The four yield curve models tested were two, 4-parameter polynomial curves and two 3-parameter models including a Laguerre function. We show that a fourth order polynomial with the cubic term omitted best fits the data. This preferred model provides good estimates of both the forward and spot rate curves as well as producing volatility structures that accorded with our a priori expectation. The preferred, fourth order polynomial model is used as the basis of a market trading strategy. In this strategy, a model predicted underpriced bonds are purchased and a model predicted overpriced bonds are sold. This strategy is shown to be superior to a random trading strategy. There is however, little evidence of market inefficiency as transaction costs account for any profit generated by the strategy.

Suggested Citation

  • Ben Hunt, 1995. "Fitting Parsimonious Yield Curve Models to Australian Coupon Bond Data," Working Paper Series 51, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:wpaper:51
    as

    Download full text from publisher

    File URL: http://www.finance.uts.edu.au/research/wpapers/wp51.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Vasicek, Oldrich A & Fong, H Gifford, 1982. "Term Structure Modeling Using Exponential Splines," Journal of Finance, American Finance Association, vol. 37(2), pages 339-348, May.
    2. R. Bhar & C. Chiarella, 1997. "Transformation of Heath?Jarrow?Morton models to Markovian systems," The European Journal of Finance, Taylor & Francis Journals, vol. 3(1), pages 1-26, March.
    3. 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.
    4. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-830, June.
    5. David Durand, 1942. "Basic Yields of Corporate Bonds, 1900-1942," NBER Chapters, in: Basic Yields of Corporate Bonds, 1900-1942, pages 1-40, National Bureau of Economic Research, Inc.
    6. Nelson, Charles R, 1972. "Estimation of Term Premiums from Average Yield Differentials in the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 40(2), pages 277-287, March.
    7. David Durand, 1942. "Basic Yields of Corporate Bonds, 1900-1942," NBER Books, National Bureau of Economic Research, Inc, number dura42-1, March.
    8. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Ben Hunt & Chris Terry, 1998. "Zero-Coupon Yield Curve Estimation: A Principal Component, Polynomial Approach," Working Paper Series 81, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    3. 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.
    4. Leo Krippner, 2006. "A Theoretically Consistent Version of the Nelson and Siegel Class of Yield Curve Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(1), pages 39-59.
    5. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Emma Berenguer-Carceles & Ricardo Gimeno & Juan M. Nave, 2012. "Estimation of the Term Structure of Interest Rates: Methodology and Applications," Working Papers 12.06, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
    2. Ram Bhar & Carl Chiarella, 1996. "Construction of Zero-Coupon Yield Curve From Coupon Bond Yield Using Australian Data," Working Paper Series 70, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Ben Hunt, 1995. "Modelling the Yields on Australian Coupon Paying Bonds," Working Paper Series 50, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    4. Lin, Bing-Huei, 1999. "Fitting the term structure of interest rates for Taiwanese government bonds," Journal of Multinational Financial Management, Elsevier, vol. 9(3-4), pages 331-352, November.
    5. Rainer Jankowitsch & Michaela Nettekoven, 2008. "Trading strategies based on term structure model residuals," The European Journal of Finance, Taylor & Francis Journals, vol. 14(4), pages 281-298.
    6. Tong, Xiaojun & He, Zhuoqiong Chong & Sun, Dongchu, 2018. "Estimating Chinese Treasury yield curves with Bayesian smoothing splines," Econometrics and Statistics, Elsevier, vol. 8(C), pages 94-124.
    7. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722, Elsevier.
    8. Damir Filipovi'c & Sander Willems, 2016. "Exact Smooth Term-Structure Estimation," Papers 1606.03899, arXiv.org, revised Aug 2018.
    9. Rafael Barros de Rezende, 2011. "Giving Flexibility to the Nelson-Siegel Class of Term Structure Models," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(1), pages 27-49.
    10. David Knezevic & Martin Nordström & Pär Österholm, 2021. "The relation between municipal and government bond yields in an era of unconventional monetary policy," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 50(1), February.
    11. Bing-Huei Lin, 2002. "Fitting term structure of interest rates using B-splines: the case of Taiwanese Government bonds," Applied Financial Economics, Taylor & Francis Journals, vol. 12(1), pages 57-75.
    12. Damir Filipović & Sander Willems, 2016. "Exact Smooth Term Structure Estimation," Swiss Finance Institute Research Paper Series 16-38, Swiss Finance Institute.
    13. Gonzalo Cortazar & Eduardo S. Schwartz & Lorenzo F. Naranjo, 2007. "Term-structure estimation in markets with infrequent trading," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(4), pages 353-369.
    14. Nagy, Krisztina, 2020. "Term structure estimation with missing data: Application for emerging markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 347-360.
    15. Fengler, Matthias R. & Hin, Lin-Yee, 2015. "A simple and general approach to fitting the discount curve under no-arbitrage constraints," Finance Research Letters, Elsevier, vol. 15(C), pages 78-84.
    16. Fernandes, Marcelo & Nunes, Clemens & Reis, Yuri, 2021. "What Drives the Nominal Yield Curve in Brazil?," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 40(2), April.
    17. Aryo Sasongko & Cynthia Afriani Utama & Buddi Wibowo & Zaäfri Ananto Husodo, 2019. "Modifying Hybrid Optimisation Algorithms to Construct Spot Term Structure of Interest Rates and Proposing a Standardised Assessment," Computational Economics, Springer;Society for Computational Economics, vol. 54(3), pages 957-1003, October.
    18. James M. Steeley, 2008. "Testing Term Structure Estimation Methods: Evidence from the UK STRIPS Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1489-1512, October.
    19. 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.
    20. Julian Manzano & Jorgen Blomvall, 2004. "Positive forward rates in the maximum smoothness framework," Quantitative Finance, Taylor & Francis Journals, vol. 4(2), pages 221-232.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uts:wpaper:51. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Duncan Ford (email available below). General contact details of provider: https://edirc.repec.org/data/sfutsau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.