Exact Smooth Term-Structure Estimation
SIAM Journal on Financial Mathematics, Forthcoming
30 Pages Posted: 14 Jun 2016 Last revised: 13 Aug 2018
Date Written: February 12, 2018
We present a non-parametric method to estimate the discount curve from market quotes based on the Moore-Penrose pseudoinverse. The discount curve reproduces the market quotes perfectly, has maximal smoothness, and is given in closed-form. The method is easy to implement and requires only basic linear algebra operations. We provide a full theoretical framework as well as several practical applications.
Keywords: Bootstrap, discount curve, forward curve, splines, term-structure estimation
JEL Classification: C61, E43, G12
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