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Interpolation of discount factors

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  • Cremers, Heinz
  • Schwarz, Willi

Abstract

This paper deals with the problem of interpolation of discount factors between time buckets. The problem occurs when price and interest rate data of a market segment are assigned to discrete time buckets. A simple criterion is developed in order to identify arbitrage-free robust interpolation methods. Methods closely examined include linear, exponential and weighted exponential interpolation. Weighted exponential interpolation, a method still preferred by some banks and also offered by commercial software vendors, creates several problems and therefore makes simple exponential interpolation a more logical choice. Linear interpolation provides a good approximation of exponential interpolation for a sufficiently dense time grid.

Suggested Citation

  • Cremers, Heinz & Schwarz, Willi, 1996. "Interpolation of discount factors," Frankfurt School - Working Paper Series 2, Frankfurt School of Finance and Management.
  • Handle: RePEc:zbw:fsfmwp:2
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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(03), pages 253-269, September.
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    Cited by:

    1. Moormann, Jürgen, 1999. "Terminologie und Glossar der Bankinformatik," Frankfurt School - Working Paper Series 11, Frankfurt School of Finance and Management.
    2. Böttcher, Henner & Seeger, Norbert, 2003. "Bilanzierung von Finanzderivaten nach HGB, EStG, IAS und US-GAAP," Frankfurt School - Working Paper Series 38, Frankfurt School of Finance and Management.
    3. Chevalier, Pierre & Heidorn, Thomas & Krieger, Christian, 2003. "Temperaturderivate zur strategischen Absicherung von Beschaffungs- und Absatzrisiken," Frankfurt School - Working Paper Series 49, Frankfurt School of Finance and Management.
    4. Chevalier, Pierre & Heidorn, Thomas & Rütze, Merle, 1999. "Gründung einer deutschen Strombörse für Elektrizitätsderivate," Frankfurt School - Working Paper Series 16, Frankfurt School of Finance and Management.
    5. Heidorn, Thomas, 1999. "Kreditderivate," Frankfurt School - Working Paper Series 13, Frankfurt School of Finance and Management.
    6. Heidorn, Thomas, 2001. "Bewertung von Kreditprodukten und Credit Default Swaps," Frankfurt School - Working Paper Series 36, Frankfurt School of Finance and Management.
    7. Cremers, Heinz, 1999. "Value at Risk-Konzepte für Marktrisiken," Frankfurt School - Working Paper Series 17, Frankfurt School of Finance and Management.
    8. Heidorn, Thomas, 1999. "Kreditrisiko (CreditMetrics)," Frankfurt School - Working Paper Series 12, Frankfurt School of Finance and Management.
    9. Biswas, Rita & Löchel, Horst, 2001. "Recent trends in U.S. and German banking: convergence or divergence?," Frankfurt School - Working Paper Series 29, Frankfurt School of Finance and Management.
    10. Kluß, Norbert & König, Markus & Cremers, Heinz, 2003. "Incentive Fees: erfolgsabhängige Vergütungsmodelle deutscher Publikumsfonds," Frankfurt School - Working Paper Series 45, Frankfurt School of Finance and Management.
    11. Becker, Gernot M. & Seeger, Norbert, 2003. "Internationale Cash Flow-Rechnungen aus Eigner- und Gläubigersicht," Frankfurt School - Working Paper Series 48, Frankfurt School of Finance and Management.
    12. Heidorn, Thomas & Kantwill, Jens, 2002. "Eine empirische Analyse der Spreadunterschiede von Festsatzanleihen zu Floatern im Euroraum und deren Zusammenhang zum Preis eines Credit Default Swaps," Frankfurt School - Working Paper Series 39, Frankfurt School of Finance and Management.
    13. Heidorn, Thomas & Klein, Hans-Dieter & Siebrecht, Frank, 2000. "Economic value added zur Prognose der Performance europäischer Aktien," Frankfurt School - Working Paper Series 27, Frankfurt School of Finance and Management.
    14. Strohhecker, Jürgen & Sokolovsky, Zbynek, 2001. "Fit für den Euro: simulationsbasierte Euro-Maßnahmenplanung für Dresdner-Bank-Geschäftsstellen," Frankfurt School - Working Paper Series 32, Frankfurt School of Finance and Management.

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