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| Author: | Tanggaard, C. |
| Title: | Nonparametric smoothing of yield curves |
| Journal: | Review of Quantitative Finance and Accounting
1997 : OCT, VOL. 9:3, p. 251-267 |
| Index terms: | TERM STRUCTURE OF INTEREST RATES PRICING BONDS |
| Language: | eng |
| Abstract: | This study presents a new nonparametric approach to the problem of inferring term structure estimates using coupon bond prices, the nonparametric estimator is defined on the basis of a penalized least squares criterion. The solution is natural cubic spline, and the study presents an iterative procedure for solving the non-linear first-order conditions. There are no apriori restrictions on the yield curve beside smoothness, and the position of the knots and optimal smoothness can be determined from data. The study also demonstrates that smoothing a simple transformation of the yield curve improves the stability of longer-term yield curve estimates. |
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