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Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada

  • David Jamieson Bolder
  • Scott Gusba

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp02-29.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 02-29.

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Length: 90 pages Abstract: This paper continues the work started by Bolder and Stréliski (1999) and considers two alternative classes of models for extracting zero-coupon and forward rates from a set of observed Government of Canada bond and treasury-bill prices. The first class of term-structure estimation methods follows from work by Fisher, Nychka, and Zervos (1994), Anderson and Sleath (2001), and Waggoner (1997). This approach employs a B-spline basis for the space of cubic splines to fit observed coupon-bond prices—as a consequence, we call these the spline-based models. This approach includes a penalty in the generalized least-squares objective function—following from Waggoner (1997)—that imposes the desired level of smoothness into the term structure of interest rates. The second class of methods is called function-based and includes variations on the work of Li et al. (2001), which uses linear combinations of basis functions, defined over the entire term-to-maturity spectrum, to fit the discount function. This class of function-based models includes the model proposed by Svensson (1994). In addition to a comprehensive discussion of these models, the authors perform an extensive comparison of these models' performance in the Canadian marketplace.
Date of creation: 2002
Date of revision:
Handle: RePEc:bca:bocawp:02-29
Contact details of provider: Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/

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  1. Andrew Jeffrey & Oliver Linton & Thong Nguyen, 2006. "Flexible Term Structure Estimation: Which Method is Preferred?," Metrika, Springer, vol. 63(1), pages 99-122, February.
  2. Oliver B. Linton & Enno Mammen & J. Nielsen & Carsten Tanggaard, 2000. "Yield Curve Estimation by Kernel Smoothing Methods," Econometric Society World Congress 2000 Contributed Papers 0235, Econometric Society.
  3. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
  4. Bolder, David & Streliski, David, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports 84, Bank of Canada.
  5. Seppälä, Juha & Viertiö, Petri, 1996. "The Term Structure of Interest Rates: Estimation and Interpretation," Research Discussion Papers 19/1996, Bank of Finland.
  6. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," Working Paper 97-10, Federal Reserve Bank of Atlanta.
  7. Mark Fisher, 2001. "Forces that shape the yield curve: Parts 1 and 2," Working Paper 2001-3, Federal Reserve Bank of Atlanta.
  8. Robert R. Bliss, 1996. "Testing term structure estimation methods," Working Paper 96-12, Federal Reserve Bank of Atlanta.
  9. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
  10. Shea, Gary S, 1985. " Interest Rate Term Structure Estimation with Exponential Splines: A Note," Journal of Finance, American Finance Association, vol. 40(1), pages 319-25, March.
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