Exact Smooth Term-Structure Estimation

SIAM Journal on Financial Mathematics, Forthcoming

Swiss Finance Institute Research Paper No. 16-38

30 Pages Posted: 14 Jun 2016 Last revised: 13 Aug 2018

See all articles by Damir Filipović

Damir Filipović

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Sander Willems

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: February 12, 2018

Abstract

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

Suggested Citation

Filipovic, Damir and Willems, Sander, Exact Smooth Term-Structure Estimation (February 12, 2018). SIAM Journal on Financial Mathematics, Forthcoming; Swiss Finance Institute Research Paper No. 16-38. Available at SSRN: https://ssrn.com/abstract=2794083 or http://dx.doi.org/10.2139/ssrn.2794083

Damir Filipovic (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

HOME PAGE: http://people.epfl.ch/damir.filipovic

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Sander Willems

Ecole Polytechnique Fédérale de Lausanne ( email )

Station 5
Odyssea 1.04
1015 Lausanne, CH-1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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