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Yield curve estimation by kernel smoothing methods

  • Linton, Oliver
  • Mammen, Enno
  • Nielsen, Jans Perch
  • Tanggaard, Carsten

We introduce a new method for the estimation of discount functions, yield curves and forward curves from government issued coupon bonds. Our approach is nonparametric and does not assume a particular functional form for the discount function although we do show how to impose various restrictions in the estimation. Our method is based on kernel smoothing and is defined as the minimum of some localized population moment condition. The solution to the sample problem is not explicit and our estimation procedure is iterative, rather like the backfitting method of estimating additive nonparametric models. We establish the asymptotic normality of our methods using the asymptotic representation of our estimator as an infinite series with declining coefficients. The rate of convergence is standard for one dimensional nonparametric regression. We investigate the finite sample performance of our method, in comparison with other well-established methods, in a small simulation experiment.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 105 (2001)
Issue (Month): 1 (November)
Pages: 185-223

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Handle: RePEc:eee:econom:v:105:y:2001:i:1:p:185-223
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  20. Schaefer, Stephen M, 1981. "Measuring a Tax-Specific Term Structure of Interest Rates in the Market for British Government Securities," Economic Journal, Royal Economic Society, vol. 91(362), pages 415-38, June.
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  22. Dahlquist, Magnus & Svensson, Lars E O, 1996. " Estimating the Term Structure of Interest Rates for Monetary Policy Analysis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 163-83, June.
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  24. Engsted, Tom & Tanggaard, Carsten, 1995. " The Predictive Power of Yield Spreads for Future Interest Rates: Evidence from the Danish Term Structure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(1), pages 145-59, March.
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