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Models of the yield curve and the curvature of the implied forward rate function

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  • Yallup, Peter J.

Abstract

We examine several alternative models of the UK gilt yield curve using daily data for the period 12 July 1996–10 February 2010. We select the best models according to two criteria: low out of sample errors in pricing bonds and low curvature of the implied forward rate curve function. We suggest additions to some of the models that significantly improve their performance. Some of the new models out perform those typically used by the central banks. In particular this paper suggests that the model used by the Canadian Central Bank which both outperforms other models and is particularly easy to estimate, is well suited to the UK gilt market.

Suggested Citation

  • Yallup, Peter J., 2012. "Models of the yield curve and the curvature of the implied forward rate function," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 121-135.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:1:p:121-135
    DOI: 10.1016/j.jbankfin.2011.06.010
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    References listed on IDEAS

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    1. repec:spr:annopr:v:260:y:2018:i:1:d:10.1007_s10479-016-2282-5 is not listed on IDEAS
    2. 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.
    3. Ivailo Arsov & Matthew Brooks & Mitch Kosev, 2013. "New Measures of Australian Corporate Credit Spreads," RBA Bulletin, Reserve Bank of Australia, pages 15-26, December.

    More about this item

    Keywords

    Bonds; Yield curve; Forward rate; Discount rate; Curve fitting;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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