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Estimating the Term Structure of Interest Rates

Author

Listed:
  • Mark Deacon
  • Andrew Derry

Abstract

This paper examines various techniques used to estimate the term structure of interest rates from the prices of government bonds; in particular comparing the current Bank of England model with two approaches suggested in the academic literature. There are two main aspects of this problem: estimating the relationship between bond yields and maturity, and the relationship between bond yields and coupon. The paper outlines how these problems are approached by the three models, and compares them on both theoretical and practical grounds. It concludes that there is a trade-off between theoretical rigour and practical considerations.

Suggested Citation

  • Mark Deacon & Andrew Derry, 1994. "Estimating the Term Structure of Interest Rates," Bank of England working papers 24, Bank of England.
  • Handle: RePEc:boe:boeewp:24
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1994/wp24.pdf
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    References listed on IDEAS

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    1. Paul Fisher & Juna Vega, 1993. "An Empirical Analysis of M4 in the United Kingdom," Bank of England working papers 21, Bank of England.
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    Citations

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    Cited by:

    1. Morini,S., 2003. "Estimación de la curva de tipos cupón-cero con polinomios de Legendre," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 21, pages 363-375, Agosto.
    2. Papa M N'Diaye & Douglas Laxton, 2002. "Monetary Policy Credibility and the Unemployment-Inflation Tradeoff; Some Evidence From 17 Industrial Countries," IMF Working Papers 02/220, International Monetary Fund.
    3. van Bergeijk, Peter A. G. & Berk, Jan Marc, 2000. "Is the yield curve a useful Information variable for the Eurosystem?," Working Paper Series 0011, European Central Bank.
    4. Lin, Bing-Huei, 1999. "Fitting the term structure of interest rates for Taiwanese government bonds," Journal of Multinational Financial Management, Elsevier, vol. 9(3-4), pages 331-352, November.
    5. David Barr & John Campbell, "undated". "Inflation, real interest rates and the bond market: a study of UK nominal and index-linked Government bond prices," CERF Discussion Paper Series 95-09, Economics and Finance Section, School of Social Sciences, Brunel University.
    6. Jelena Zubkova, 2003. "Interest Rate Term Structure in Latvia in the Monetary Policy Context," Working Papers 2003/03, Latvijas Banka.
    7. Martin D. D. Evans, 2003. "Real risk, inflation risk, and the term structure," Economic Journal, Royal Economic Society, vol. 113(487), pages 345-389, April.
    8. Michael Joyce & Vicky Read, 2002. "Asset price reactions to RPI announcements," Applied Financial Economics, Taylor & Francis Journals, vol. 12(4), pages 253-270.
    9. repec:wsi:rpbfmp:v:06:y:2003:i:03:n:s0219091503001110 is not listed on IDEAS
    10. Emiliano Delfau, 2017. "Métodos de Estimación de Curvas de Rendimiento Cupón Cero en Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 623, Universidad del CEMA.
    11. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR;CES;MSH, vol. 30(82), pages 291-333.
    12. J. Huston McCulloch, 2001. "The Inflation Premium implicit in the US Real and Nominal," Computing in Economics and Finance 2001 210, Society for Computational Economics.
    13. Schich, Sebastian T., 1996. "Alternative specifications of the German term structure and its information content regarding inflation," Discussion Paper Series 1: Economic Studies 1996,08e, Deutsche Bundesbank.
    14. Steeley, James M., 1997. "Implied volatility from the term structure: a simple analytical approximation," Economics Letters, Elsevier, vol. 57(3), pages 345-352, December.
    15. James M. Steeley, 2014. "A shape-based decomposition of the yield adjustment term in the arbitrage-free Nelson and Siegel (AFNS) model of the yield curve," Applied Financial Economics, Taylor & Francis Journals, vol. 24(10), pages 661-669, May.
    16. Martin Evans, 1998. "Looking Behind the U. K.Term Structure: Were there Peso Problems in Inflation?," Finance 9809001, EconWPA.
    17. Bing-Huei Lin & Ren-Raw Chen & Jian-Hsin Chou, 1999. "Pricing and quality option in Japanese government bond futures," Applied Financial Economics, Taylor & Francis Journals, vol. 9(1), pages 51-65.
    18. Poletti Laurini, Márcio & Moura, Marcelo, 2010. "Constrained smoothing B-splines for the term structure of interest rates," Insurance: Mathematics and Economics, Elsevier, vol. 46(2), pages 339-350, April.
    19. J. Huston McCulloch & Levin A. Kochen, 1998. "The Inflation Premium Implicit in the US Real and Nominal Term Structures of Interest Rates," Working Papers 98-12, Ohio State University, Department of Economics.
    20. Bing-Huei Lin, 2002. "Fitting term structure of interest rates using B-splines: the case of Taiwanese Government bonds," Applied Financial Economics, Taylor & Francis Journals, vol. 12(1), pages 57-75.
    21. repec:wsi:ijtafx:v:11:y:2008:i:05:n:s0219024908004919 is not listed on IDEAS
    22. Lin, Bing-Huei & Yeh, Shih-Kuo, 2001. "Estimation for factor models of term structure of interest rates with jumps: the case of the Taiwanese government bond market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(2), pages 167-197, June.
    23. Shang-Wu Yu, 1999. "Approximating the term structure of interest rates in Japan," Applied Economics Letters, Taylor & Francis Journals, vol. 6(7), pages 403-407.

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