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Testing term structure estimation methods : Evidence from the UK STRIPs market
| Content Provider | Semantic Scholar |
|---|---|
| Copyright Year | 2007 |
| Abstract | Prices and yields of UK government zero-coupon bonds are used to test alternative yield curve estimation models. Zero-coupon bonds permit a more pure comparison, as the models are providing only the interpolation service and not also making estimation feasible. It is found that better yield curve estimates are obtained by fitting to the yield curve directly rather than by fitting first to the discount function. A simple procedure to set the smoothness of the fitted curves is developed, and a positive relationship between over-smoothness and fitting error is identified. A cubic spline function fitted directly to the yield curve provides the best overall balance of fitting error and smoothness, both along the yield curve and within local maturity regions. This research received financial support from the Leverhulme Trust, Personal Research Fellowship, no.10505. I am very grateful for this funding and also for the support of H.M. Treasury’s Debt Management Office. Address for correspondence: Professor James M. Steeley, Aston Business School, Aston University, Birmingham, B4 7ET, UK. Tel: 0121-204-3248. E-mail: j.m.steeley@aston.ac.uk. Testing term structure estimation methods: Evidence from the UK STRIPs market Abstract Prices and yields of UK government zero-coupon bonds are used to test alternative yield curve estimation models. Zero-coupon bonds permit a more pure comparison, as the models are providing only the interpolation service and not also making estimation feasible. It is found that better yield curve estimates are obtained by fitting to the yield curve directly rather than by fitting first to the discount function. A simple procedure to set the smoothness of the fitted curves is developed, and a positive relationship between over-smoothness and fitting error is identified. A cubic spline function fitted directly to the yield curve provides the best overall balance of fitting error and smoothness, both along the yield curve and within local maturity regions.Prices and yields of UK government zero-coupon bonds are used to test alternative yield curve estimation models. Zero-coupon bonds permit a more pure comparison, as the models are providing only the interpolation service and not also making estimation feasible. It is found that better yield curve estimates are obtained by fitting to the yield curve directly rather than by fitting first to the discount function. A simple procedure to set the smoothness of the fitted curves is developed, and a positive relationship between over-smoothness and fitting error is identified. A cubic spline function fitted directly to the yield curve provides the best overall balance of fitting error and smoothness, both along the yield curve and within local maturity regions. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://www.fma.org/Orlando/Papers/UKZEROS.pdf |
| Language | English |
| Access Restriction | Open |
| Subject Keyword | Arabic numeral 0 Capability Maturity Model Cubic Hermite spline Cubic function Email Estimated Interpolation Imputation Technique STRIPS Seizures Spline (mathematics) Uniform Resource Identifier |
| Content Type | Text |
| Resource Type | Article |
