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A Nonparametric Method For Term Structure Fitting With Automatic Smoothing

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  • Victor A. Lapshin

    (National Research University Higher School of Economics)

  • Vadim Ya. Kaushanskiy

    (National Research University Higher School of Economics)

Abstract

We present a new nonparametric method for fitting the term structure of interest rates from bond prices. Our method is a variant of the smoothing spline approach, but within our framework we are able to determine the smoothing coefficient automatically from the data using generalized crossvalidation or maximum likelihood estimates. We present an effective numerical algorithm to simultaneously find the term structure and the optimal smoothing coefficient. Finally, we compare the proposed nonparametric fitting method with other parametric and nonparametric methods to show its superior performance.

Suggested Citation

  • Victor A. Lapshin & Vadim Ya. Kaushanskiy, 2014. "A Nonparametric Method For Term Structure Fitting With Automatic Smoothing," HSE Working papers WP BRP 39/FE/2014, National Research University Higher School of Economics.
    • Handle: RePEc:hig:wpaper:39/fe/2014
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    References listed on IDEAS

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    1. 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(3), pages 253-269, September.
    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.
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    6. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    7. Gimeno, Ricardo & Nave, Juan M., 2009. "A genetic algorithm estimation of the term structure of interest rates," Computational Statistics & Data Analysis, Elsevier, vol. 53(6), pages 2236-2250, April.
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    Cited by:

    1. Victor Lapshin, 2019. "A Nonparametric Approach to Bond Portfolio Immunization," Mathematics, MDPI, vol. 7(11), pages 1-12, November.

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    More about this item

    Keywords

    regularization; smoothing splines; term structure of interest rates.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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