Modelling the Yield Curve with Orthonormalised Laguerre Polynomials: A Consistent Cross-Sectional and Inter-Temporal Approach
AbstractThis 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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Bibliographic InfoPaper provided by University of Waikato, Department of Economics in its series Working Papers in Economics with number 03/02.
Length: 40 pages
Date of creation: 30 Sep 2003
Date of revision:
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yield curve; term structure; expectations hypothesis; exponential polynomial; Nelson and Siegel model;
Find related papers by JEL classification:
- C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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