A Nonparametric Method for Term Structure Fitting with Automatic Smoothing

30 Pages Posted: 9 Dec 2014

See all articles by Victor Lapshin

Victor Lapshin

National Research University Higher School of Economics

Vadim Kaushanskiy

National Research University Higher School of Economics

Date Written: December 8, 2014

Abstract

We present a new nonparametric method for fitting the term structure of interest rates from bond prices. Our method is a variant of the smoothing spline approach, but within our framework we are able to determine the smoothing coefficient automatically from the data using generalized crossvalidation or maximum likelihood estimates. We present an effective numerical algorithm to simultaneously find the term structure and the optimal smoothing coefficient. Finally, we compare the proposed nonparametric fitting method with other parametric and nonparametric methods to show its superior performance.

Keywords: regularization, smoothing splines, term structure of interest rates.

JEL Classification: G12, C14.

Suggested Citation

Lapshin, Victor and Kaushanskiy, Vadim, A Nonparametric Method for Term Structure Fitting with Automatic Smoothing (December 8, 2014). Higher School of Economics Research Paper No. WP BRP 39/FE/2014 , Available at SSRN: https://ssrn.com/abstract=2535244 or http://dx.doi.org/10.2139/ssrn.2535244

Victor Lapshin

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Vadim Kaushanskiy (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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