A Nonparametric Method for Term Structure Fitting with Automatic Smoothing
30 Pages Posted: 9 Dec 2014
Date Written: December 8, 2014
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.
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