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Yield curve estimation by kernel smoothing methods

Linton, Oliver and Mammen, Enno and Perch Nielsen, Jens and Tanggaard, C (2000) Yield curve estimation by kernel smoothing methods. Econometrics; EM/2000/385, EM/00/385. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London.

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Identification Number: EM/00/385

Abstract

We introduce a new method for the estimation of discount functions, yield curves and forward curves from government issued coupon bonds. Our approach is nonparametric and does not assume a particular functional form for the discount function although we do show how to impose various restrictions in the estimation. Our method is based on kernel smoothing and is defined as the minimum of some localized population moment condition. The solution to the sample problem is not explicit and our estimation procedure is iterative, rather like the backfitting method of estimating additive nonparametric models. We establish the asymptotic normality of our methods using the asymptotic representation of our estimator as an infinite series with declining coefficients. The rate of convergence is standard for one dimensional nonparametric regression. We investigate the finite sample performance of our method, in comparison with other well-established methods, in a small simulation experiment.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk
Additional Information: © 2000 the authors
Subjects: H Social Sciences > HB Economic Theory
JEL classification: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C14 - Semiparametric and Nonparametric Methods
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Departments > Economics
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 27 Apr 2007
Last Modified: 27 Feb 2014 15:36
URI: http://eprints.lse.ac.uk/id/eprint/2270

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