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Term Structure Analysis with Big Data

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  • Martin M. Andreasen
  • Jens H. E. Christensen
  • Glenn D. Rudebusch

Abstract

Analysis of the term structure of interest rates almost always takes a two-step approach. First, actual bond prices are summarized by interpolated synthetic zero-coupon yields, and second, a small set of these yields are used as the source data for further empirical examination. In contrast, we consider the advantages of a one-step approach that directly analyzes the universe of bond prices. To illustrate the feasibility and desirability of the onestep approach, we compare arbitrage-free dynamic term structure models estimated using both approaches. We also provide a simulation study showing that a one-step approach can extract the information in large panels of bond prices and avoid any arbitrary noise introduced from a first-stage interpolation of yields.

Suggested Citation

  • Martin M. Andreasen & Jens H. E. Christensen & Glenn D. Rudebusch, 2017. "Term Structure Analysis with Big Data," Working Paper Series 2017-21, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2017-21
    Note: This version: September 15, 2017.
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    Cited by:

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    2. Antonio Díaz & Francisco Jareño & Eliseo Navarro, 2022. "Yield curve data choice and potential moral hazard: An empirical exercise on pricing callable bonds," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2124-2145, April.
    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. Antonio Díaz & Francisco Jareño & Eliseo Navarro, 2020. "Yield curves from different bond data sets," Review of Derivatives Research, Springer, vol. 23(2), pages 191-226, July.
    5. Díaz, Antonio & Jareño, Francisco & Navarro, Eliseo, 2018. "Zero-coupon interest rates: Evaluating three alternative datasets," Economics Discussion Papers 2018-67, Kiel Institute for the World Economy (IfW Kiel).
    6. 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.
    7. Umut Akovali & Kamil Yilmaz, 2021. "Unconventional Monetary Policy and Bond Market Connectedness in the New Normal," Koç University-TUSIAD Economic Research Forum Working Papers 2101, Koc University-TUSIAD Economic Research Forum.

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    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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