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Computing maximally smooth forward rate curves for coupon bonds: An iterative piecewise quartic polynomial interpolation method

Author

Listed:
  • Paul Beaumont

    () (Department of Economics, Florida State University Author-X-Name-First: Yaniv)

  • Yaniv Jerassy-Etzion

    () (Department of Economics and Management; Ruppin Academic Center)

Abstract

We present a simple and fast iterative, linear algorithm for simultaneously stripping the coupon payments from and smoothing the yield curve of the term structure of interest rates. The method minimizes pricing errors, constrains initial and terminal conditions of the curves and produces maximally smooth forward rate curves.

Suggested Citation

  • Paul Beaumont & Yaniv Jerassy-Etzion, 2011. "Computing maximally smooth forward rate curves for coupon bonds: An iterative piecewise quartic polynomial interpolation method," Working Papers wp2011_08_03, Department of Economics, Florida State University.
  • Handle: RePEc:fsu:wpaper:wp2011_08_03
    as

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    File URL: ftp://econpapers.fsu.edu/RePEc/fsu/wpaper/wp2011_08_03.pdf
    File Function: First version, 2011-08
    Download Restriction: no

    References listed on IDEAS

    as
    1. Vasicek, Oldrich A & Fong, H Gifford, 1982. " Term Structure Modeling Using Exponential Splines," Journal of Finance, American Finance Association, vol. 37(2), pages 339-348, May.
    2. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    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. Patrick Hagan & Graeme West, 2006. "Interpolation Methods for Curve Construction," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(2), pages 89-129.
    5. Mark Fisher, 2004. "Modeling the term structure of interest rates: an introduction," Economic Review, Federal Reserve Bank of Atlanta, issue Q 3, pages 41-62.
    6. Jordan, James V. & Mansi, Sattar A., 2003. "Term structure estimation from on-the-run Treasuries," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1487-1509, August.
    7. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-830, June.
    8. Julian Manzano & Jorgen Blomvall, 2004. "Positive forward rates in the maximum smoothness framework," Quantitative Finance, Taylor & Francis Journals, vol. 4(2), pages 221-232.
    9. 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.
    10. Ricardo Gimeno & Juan M. Nave, 2006. "Genetic algorithm estimation of interest rate term structure," Working Papers 0634, Banco de EspaƱa;Working Papers Homepage.
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    More about this item

    Keywords

    Term structure of interest rates; yield curve; coupon stripping; curve interpolation;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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