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Comparative Analysis of Zero Coupon Yield Curve Estimation Methods Using JGB Price Data

Author

Listed:
  • Kentaro Kikuchi

    (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kentarou.kikuchi@boj.or.jp))

  • Kohei Shintani

    (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouhei.shintani@boj.or.jp))

Abstract

This paper conducts a comparative analysis of the diverse methods for estimating the Japanese government bond (JGB) zero coupon yield curve (hereafter, zero curve) according to the criteria that estimation methods should meet. Previous studies propose many methods for estimating the zero curve from the market prices of coupon-bearing bonds. In estimating the JGB zero curve, however, an undesirable method may fail to accurately grasp the features of the zero curve. In order to select an appropriate estimation method for the JGB, we set the following criteria for the zero curve: (1) estimates should not fall below zero, (2) estimates should not take abnormal values, (3) estimates should have a good fit to market prices, and (4) the zero curve should have little unevenness. The method which meets these criteria enables us to estimate the zero curve with a good fit to the JGB market prices and a proper interpolation to grasp the features of the zero curve. Based on our analysis, we conclude that the method proposed in Steeley [1991] is the best in light of the criteria for the JGB price data. In fact, the zero curve based on this method can fully capture the characteristics of the JGB zero curve in a prolonged period of accommodative monetary policy.

Suggested Citation

  • Kentaro Kikuchi & Kohei Shintani, 2012. "Comparative Analysis of Zero Coupon Yield Curve Estimation Methods Using JGB Price Data," IMES Discussion Paper Series 12-E-04, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:12-e-04
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    File URL: http://www.imes.boj.or.jp/research/papers/english/12-E-04.pdf
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    References listed on IDEAS

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    1. Tanggaard, Carsten, 1997. "Nonparametric Smoothing of Yield Curves," Review of Quantitative Finance and Accounting, Springer, vol. 9(3), pages 251-267, October.
    2. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier.
    3. Mark Fisher & Douglas Nychka & David Zervos, 1995. "Fitting the term structure of interest rates with smoothing splines," Finance and Economics Discussion Series 95-1, Board of Governors of the Federal Reserve System (U.S.).
    4. Jarrow, Robert & Ruppert, David & Yu, Yan, 2004. "Estimating the Interest Rate Term Structure of Corporate Debt With a Semiparametric Penalized Spline Model," Journal of the American Statistical Association, American Statistical Association, vol. 99, pages 57-66, January.
    5. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," FRB Atlanta Working Paper 97-10, Federal Reserve Bank of Atlanta.
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    Cited by:

    1. Wali Ullah & Yasumasa Matsuda, 2014. "Generalized Nelson-Siegel Term Structure Model : Do the second slope and curvature factors improve the in-sample fit and out-of-sample forecast?," TERG Discussion Papers 312, Graduate School of Economics and Management, Tohoku University.

    More about this item

    Keywords

    coupon-bearing government bond; zero coupon yield; piecewise polynomial function;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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