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Yield curve modelling and a conceptual framework for estimating yield curves: evidence from the European Central Bank’s yield curves

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  • Nymand-Andersen, Per

Abstract

The European Central Bank (ECB), as part of its forward-looking strategy, needs high-quality financial market statistical indicators as a means to facilitate evidence-based and sound decision-making. Such indicators include timely market intelligence and information to gauge investors’ expectations and reaction functions with regard to policy decisions. The main use of yield curve estimations from an ECB monetary policy perspective is to obtain a proper empirical representation of the term structure of interest rates for the euro area which can be interpreted in terms of market expectations of monetary policy, economic activity and inflation expectations over short-, medium- and long-term horizons. Yield curves therefore play a pivotal role in the monitoring of the term structure of interest rates in the euro area. In this context, the purpose of this paper is twofold: firstly, to pave the way for a conceptual framework with recommendations for selecting a high-quality government bond sample for yield curve estimations, where changes mainly reflect changes in the yields-to-maturity rather than in other attributes of the underlying debt securities and models; and secondly, to supplement the comprehensive – mainly theoretical – literature with the more empirical side of term structure estimations by applying statistical tests to select and produce representative yield curves for policymakers and market-makers. JEL Classification: G1, E4, E5

Suggested Citation

  • Nymand-Andersen, Per, 2018. "Yield curve modelling and a conceptual framework for estimating yield curves: evidence from the European Central Bank’s yield curves," Statistics Paper Series 27, European Central Bank.
  • Handle: RePEc:ecb:ecbsps:201827
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpsps/ecb.sps27.en.pdf
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    References listed on IDEAS

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    2. 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.
    3. Barros Luís, Jorge & Cassola, Nuno, 2001. "A two-factor model of the German term structure of interest rates," Working Paper Series 46, European Central Bank.
    4. Brousseau, Vincent, 2002. "The functional form of yield curves," Working Paper Series 148, European Central Bank.
    5. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," FRB Atlanta Working Paper 97-10, Federal Reserve Bank of Atlanta.
    6. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    7. van Bergeijk, Peter A. G. & Berk, Jan Marc, 2000. "Is the yield curve a useful Information variable for the Eurosystem?," Working Paper Series 11, European Central Bank.
    8. David Bolder & Scott Gusba, 2002. "Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada," Staff Working Papers 02-29, Bank of Canada.
    9. David Bolder & David Stréliski, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports 84, Bank of Canada.
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    Cited by:

    1. Koo, Bonsoo & La Vecchia, Davide & Linton, Oliver, 2021. "Estimation of a nonparametric model for bond prices from cross-section and time series information," Journal of Econometrics, Elsevier, vol. 220(2), pages 562-588.
    2. Giudice, Gabriele & de Manuel Aramendía, Mirzha & Kontolemis, Zenon & Monteiro, Daniel P., 2019. "A European safe asset to complement national government bonds," MPRA Paper 95748, University Library of Munich, Germany.
    3. Koo, B. & La Vecchia, D. & Linton, O., 2019. "Nonparametric Recovery of the Yield Curve Evolution from Cross-Section and Time Series Information," Cambridge Working Papers in Economics 1916, Faculty of Economics, University of Cambridge.
    4. Lapshin, Victor & Sohatskaya, Sofia, 2020. "Choosing the weighting coefficients for estimating the term structure from sovereign bonds," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 635-648.
    5. Dewundara Liyanage P. M. Rathnasingha & Kangara Pathirannehelage N. S. Dayarathne, 2021. "Constructing the Yield Curve for Sri Lankas Government Bond Market," International Journal of Business and Economic Affairs (IJBEA), Sana N. Maswadeh, vol. 6(1), pages 56-69.
    6. Sabit Khakimzhanov & Yerulan Mustafin & Olzhas Kubenbayev & Dulat Atabek, 2019. "Constructing a Yield Curve in a Market with Low Liquidity," Russian Journal of Money and Finance, Bank of Russia, vol. 78(4), pages 71-98, December.
    7. Rostagno, Massimo & Altavilla, Carlo & Carboni, Giacomo & Lemke, Wolfgang & Motto, Roberto & Saint Guilhem, Arthur, 2021. "Combining negative rates, forward guidance and asset purchases: identification and impacts of the ECB’s unconventional policies," Working Paper Series 2564, European Central Bank.

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    More about this item

    Keywords

    data quality; term structure; yield curve models;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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