High Quality Yield Curves from a Generalized Optimization Framework
(English)Manuscript (preprint) (Other academic)
Traditional methods for estimating yield curves are special cases of a generalized optimization framework. For pricing out-of-sample in both the Swedish and U.S. interest rate swap (IRS) markets, it is shown that the framework dominates or is close to dominating the traditional methods in the comparison by first order stochastic dominance. When measuring the perceived variance for each traditional method, it is shown that, for the same level of market consistency, the framework produces lower variance. For these new yield curves, PCA of innovations in forward rates shows that the first three loadings (shift, twist and butterfly) do not explain movements in the short end, and that the subsequent loadings explain uncorrelated movements in the short end.
Term structure estimation, Forward rate, Principal Components Analysis (PCA)
IdentifiersURN: urn:nbn:se:liu:diva-97405OAI: oai:DiVA.org:liu-97405DiVA: diva2:647649