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Flexible term structure estimation: which method is preferable?

Jeffrey, Andrew, Linton, Oliver and Nguyen, Thong (2001) Flexible term structure estimation: which method is preferable? Discussion papers (513). Financial Markets Group, London School of Economics and Political Science, London, UK. (Submitted)

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We show that the recently developed nonparametric procedure for fitting the term structure of interest rates developed by Linton, Mammen, Nielson and Tanggaard (2000) overall performs notably better than the highly flexible McCulloch (1975) cubic spline and Fama and Bliss (1987) bootstrap methods. However, if interest is limited to the Treasury bill region alone then the Fama-Bliss method demonstrates superior performance. We further show, via simulation, that using the estimated short rate from Linton-Mammen-Nielson-Tanggaard procedure as a proxy for the short rate has higher precision than the commonly used proxies of the one and three month Treasury bill rates. It is demonstrated that this precision is important when using proxies to estimate the stochastic process governing the evolution of the short rate.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2001 The Authors
Divisions: Financial Markets Group
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 06 Aug 2009 14:17
Last Modified: 05 Dec 2020 00:38

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