Fitting term structure of interest rates using B-splines: the case of Taiwanese Government bonds
The B-spline curve fitting technique is one of the most popular empirical methodologies for estimating the term structure of interest rates, due to its stability and reliability in practical applications. This paper applies the B-spline technique to estimating the term structure for an important small-sized emerging bond market, the Taiwanese Government Bond (TGB) market. Regardless of the efficiency of the obsrved market data, several issues are investigated when applying this fitting technique. The application of the B-spline functions is first discussed to approximate the discount function, spot yield curve and forward yield curve respectively. The coupon payment effect on the TGB price is identified and is incorporated into the model estimation. A sensitivity analysis for the B-spline technique is performed with respect to changes in the within-sample knots, and a feasible method suggested for choosing the optimal knots within the approximation space in view of standard pricing error minimization. The results show that the B-spline methodology, when applied to discount fitting and spot fitting, is satisfactory in obtaining reliable term structure. It is also not very sensitive to some ad hoc choices in the model estimation.
Volume (Year): 12 (2002)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAFE20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAFE20|
When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:12:y:2002:i:1:p:57-75. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.