Flexible Term Structure Estimation: Which Method Is Preferred?
AbstractWe show that the recently developed nonparametric procedure for fitting the term structure of interest rates developed by Linton, Mammen, Nielsen, and Tanggaard (2000) overall performs notably better than the highly flexible McCulloch (1975) cubic spline and Fama and Bliss (1987) bootstrap methods. However, if interest is limited to the Treasury bill region alone then the Fama-Bliss method demonstrates superior performance. We further show, via simulation, that using the estimated short rate from the Linton-Mammen-Nielsen-Tanggaard procedure as a proxy for the short rate has higher precision then the commonly used proxies of the one and three month Treasury bill rates. It is demonstrated that this precision is important when using proxies to estimate the stochastic process governing the evolution of the short rate.
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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm171.
Date of creation: 01 Feb 2001
Date of revision: 01 Oct 2001
Term Structure; yield curve estimation; curve fitting;
Other versions of this item:
- Andrew Jeffrey & Oliver Linton & Thong Nguyen, 2006. "Flexible Term Structure Estimation: Which Method is Preferred?," Metrika, Springer, vol. 63(1), pages 99-122, February.
- Oliver Linton & Andrew Jeffrey & Thong Nguyen, 2001. "Flexible Term Structure Estimation: Which Method is Preferred?," FMG Discussion Papers dp385, Financial Markets Group.
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