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Yield Curve Estimation by Kernel Smoothing Methods

  • Oliver B. Linton

    (London School of Economics)

  • Enno Mammen

    (Ruprecht-Karls Universitat Heidelberg)

  • J. Nielsen

    (Codan)

  • Carsten Tanggaard

    (Aarhus School of Business)

We introduce a new method for the estimation of discount functions, yield curves and forward curves from government issued coupon bonds. Our approach is nonparametric and does not assume a particular functional form for the discount function although we do show how to impose various restrictions in the estimation. Our method is based on kernel smoothing and is defined as the minimum of some localized population moment condition. The solution to the sample problem is not explicit and our estimation procedure is iterative, rather like the backfitting method of estimating additive nonparametric models. We establish the asymptotic normality of our methods using the asymptotic representation of our estimator as an infinite series with declining coefficients. The rate of convergence is standard for one dimensional nonparametric regression. We investigate the finite sample performance of our method, in comparison with other well-established methods, in a small simulation experiment.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0235.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0235
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  2. Oliver Linton, 2000. "Efficient estimation of generalized additive nonparametric regression models," LSE Research Online Documents on Economics 314, London School of Economics and Political Science, LSE Library.
  3. Dahlquist, Magnus & Svensson, Lars E O, 1996. " Estimating the Term Structure of Interest Rates for Monetary Policy Analysis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 163-83, June.
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  11. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
  12. 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.
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  15. Marti G. Subrahmanyam & Young Ho Eom & Jun Uno, 1998. "Coupon Effects and the Pricing of Japanese Government Bonds: An Empirical Analysis," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-078, New York University, Leonard N. Stern School of Business-.
  16. Hausman, Jerry A & Newey, Whitney K, 1995. "Nonparametric Estimation of Exact Consumers Surplus and Deadweight Loss," Econometrica, Econometric Society, vol. 63(6), pages 1445-76, November.
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  19. Chambers, Donald R. & Carleton, Willard T. & Waldman, Donald W., 1984. "A New Approach to Estimation of the Term Structure of Interest Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(03), pages 233-252, September.
  20. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June.
  21. Andrew Chesher, 1997. "Diet Revealed?: Semiparametric Estimation of Nutrient Intake-Age Relationships," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 160(3), pages 389-428.
  22. Jeffrey A. Frankel & Cara S. Lown, 1991. "An Indicator of Future Inflation Extracted From the Steepness of the Interest Rate Yield Curve Along Its Entire Length," NBER Working Papers 3751, National Bureau of Economic Research, Inc.
  23. Shea, Gary S., 1984. "Pitfalls in Smoothing Interest Rate Term Structure Data: Equilibrium Models and Spline Approximations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(03), pages 253-269, September.
  24. Robinson, Peter M, 1988. "The Stochastic Difference between Econometric Statistics," Econometrica, Econometric Society, vol. 56(3), pages 531-48, May.
  25. Engsted, Tom & Tanggaard, Carsten, 1995. " The Predictive Power of Yield Spreads for Future Interest Rates: Evidence from the Danish Term Structure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(1), pages 145-59, March.
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  28. repec:cep:stiecm:/2000/386 is not listed on IDEAS
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