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Testing Term Structure Estimation Methods: Evidence from the UK STRIPS Market

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  • JAMES M. STEELEY

Abstract

Prices and yields of UK government zero-coupon bonds are used to test alternative yield curve estimation models. Zero-coupon bonds permit a more pure comparison, as the models are providing only the interpolation service and also not making estimation feasible. It is found that better yield curves estimates are obtained by fitting to the yield curve directly rather than fitting first to the discount function. A simple procedure to set the smoothness of the fitted curves is developed, and a positive relationship between over-smoothness and the fitting error is identified. A cubic spline function fitted directly to the yield curve provides the best overall balance of fitting error and smoothness, both along the yield curve and within local maturity regions. Copyright (c) 2008 The Ohio State University.

Suggested Citation

  • James M. Steeley, 2008. "Testing Term Structure Estimation Methods: Evidence from the UK STRIPS Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1489-1512, October.
  • Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:7:p:1489-1512
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    Cited by:

    1. Baruník, Jozef & Malinská, Barbora, 2016. "Forecasting the term structure of crude oil futures prices with neural networks," Applied Energy, Elsevier, vol. 164(C), pages 366-379.
    2. Martin M. Andreasen & Jens H.E. Christensen & Glenn D. Rudebusch, 1809. "Term Structure Analysis with Big Data," CREATES Research Papers 2017-31, Department of Economics and Business Economics, Aarhus University.
    3. Cousin, Areski & Maatouk, Hassan & Rullière, Didier, 2016. "Kriging of financial term-structures," European Journal of Operational Research, Elsevier, vol. 255(2), pages 631-648.
    4. Brooks, Robert & Cline, Brandon N. & Enders, Walter, 2015. "A comparison of the information in the LIBOR and CMT term structures of interest rates," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 239-253.

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