Multiple Yield Curves Estimation Using A Generalized Optimization Framework
(English)Manuscript (preprint) (Other academic)
After the credit crunch which started in 2007, significant basis spreads for exchanging floating payments of different tenors appeared. To deal with the problem, multiple yield curves estimation methods have been suggested. In this paper, a generalized optimization framework is extended to a multiple yield curve framework. As has been observed by practitioners, extending traditional cubic splines to multiple yield curves, though consistent with the market prices, does not provide smooth and realistic yield curves. When the parameters in the generalized optimization framework are selected to exactly match market prices, the yield curves are much more realistic, but small waves still remain due to noise in the input data. To avoid having a rough yield curve, we also study the least squares parameter setting in the generalized optimization framework. This method gives much smoother and more realistic yield curves with adjustments to market prices that are less than 0.2 basis points. When exact traditional methods are extended to estimate multiple yield curves, then even tiny pricing errors can cause a situation where the shape constraints prevent the method from finding realistic yield curves.
Multiple yield curve estimation, Overnight Index Swap (OIS), Basis spread, Tenor Swap (TS)
IdentifiersURN: urn:nbn:se:liu:diva-97406OAI: oai:DiVA.org:liu-97406DiVA: diva2:647650