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The Term Structure of Interest Rates: Estimation and Interpretation

  • Seppälä, Juha

    (Bank of Finland Research)

  • Viertiö, Petri

    (Bank of Finland Research)

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    This document reports the currently used term structure estimation method at the Bank of Finland and discusses interpretation of the results it generates. We start by introducing two widely used term structure estimation methods: the Cubic Spline Function method and the Nelson-Siegel approach. We compare their results, paying special attention to the smoothness of forward interest rates and distribution of pricing errors. Next, we introduce the Bank of Finland's method, commenting on its strengths and weaknesses. Finally, we discuss interpretation of the term structure of interest rates with emphasis on the inflation expectations and the role of the time-varying risk premia.

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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 19/1996.

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    Length: 59 pages
    Date of creation: 05 Sep 1996
    Date of revision:
    Handle: RePEc:hhs:bofrdp:1996_019
    Contact details of provider: Postal:
    Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland

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