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Modelling the Yield Curve with Orthonormalised Laguerre Polynomials: A Consistent Cross-Sectional and Inter-Temporal Approach

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  • Leo Krippner

    ()
    (AMP Capital Investors)

Abstract

This article proposes the orthonormalised Laguerre polynomial (OLP) model of the yield curve, a generic linear model that is both cross-sectionally consistent (that is, it reliably fits the yield curve at a given point in time), and inter-temporally consistent (that is, the cross-sectional parameters are shown to be consistent over time within the expectations hypothesis framework). The OLP model generalises the exponential-polynomial model for a single yield curve, as originally proposed by Nelson and Siegel (1987), and also allows for the simultaneous modelling of other same-currency yield curves that have instrument-specific differences (such as default risk), as in Houweling, Hoek and Kleibergen (2001). New Zealand data is used to illustrate the empirical application of the OLP model.

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File URL: ftp://mngt.waikato.ac.nz/RePEc/wai/econwp/0302.pdf
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Bibliographic Info

Paper provided by University of Waikato, Department of Economics in its series Working Papers in Economics with number 03/02.

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Length: 40 pages
Date of creation: 30 Sep 2003
Date of revision:
Handle: RePEc:wai:econwp:03/02

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Related research

Keywords: yield curve; term structure; expectations hypothesis; exponential polynomial; Nelson and Siegel model;

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References

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  1. Paul Soderlind & Lars E. O. Svensson, 1997. "New Techniques to Extract Market Expectations from Financial Instruments," NBER Working Papers 5877, National Bureau of Economic Research, Inc.
  2. 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.
  3. Jean Helwege & Christopher M. Turner, 1999. "The Slope of the Credit Yield Curve for Speculative-Grade Issuers," Journal of Finance, American Finance Association, vol. 54(5), pages 1869-1884, October.
  4. Houweling, P. & Hoek, J. & Kleibergen, F.R., 1999. "The Joint Estimation of Term Structures and Credit Spreads," Econometric Institute Research Papers EI 9916-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  5. 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.
  6. Seppälä, Juha & Viertiö, Petri, 1996. "The Term Structure of Interest Rates: Estimation and Interpretation," Research Discussion Papers 19/1996, Bank of Finland.
  7. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 481-523.
  8. 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.
  9. Francis X. Diebold & Canlin Li, 2002. "Forecasting the Term Structure of Government Bond Yields," Center for Financial Institutions Working Papers 02-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
  10. Pham, Toan M., 1998. "Estimation of the term structure of interest rates: an international perspective," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 265-283, September.
  11. Hördahl, Peter, 2000. "Estimating the Implied Distribution of the Future Short-Term Interest Rate Using the Longstaff-Schwartz Model," Working Paper Series 111, Sveriges Riksbank (Central Bank of Sweden).
  12. Mansi, Sattar A & Phillips, Jeffrey H, 2001. "Modeling the Term Structure from the On-the-Run Treasury Yield Curve," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 24(4), pages 545-64, Winter.
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Cited by:
  1. 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.
  2. 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.

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