Term Structure Estimation from On-the-Run Treasuries

Posted: 5 Dec 2001

See all articles by Sattar Mansi

Sattar Mansi

Virginia Polytechnic Institute & State University

James V. Jordan

National Economic Research Associates

Multiple version iconThere are 2 versions of this paper

Abstract

Five methods of estimating the term structure from on-the-run Treasuries are compared with respect to error in spot rate estimation, forward rate estimation, and coupon bond pricing. The methods can all be considered variants of the bootstrapping technique. The two discrete-time bootstrapping methods are based on linear and cubic interpolation of the yield curve. Two continuous-time bootstrapping methods are based on exponential functional forms for the yield curve and a third is based on a bilinear transformation of a power function. Simulated bond samples with and without random error are employed to study the relative importance of interpolation error and random pricing error. CRSP bond data are used in assessing the accuracy of the methods in pricing liquid and illiquid bonds. Two methods stand out in terms of good interpolation properties and robustness in the face of pricing errors. These are the Nelson and Siegel and the Mansi and Phillips methods. Both are based on exponential functions.

Keywords: Term structure of interest rates, On-the-run Treasuries, Bond valuation, Liquidity

JEL Classification: D4, E4, G1, N2

Suggested Citation

Mansi, Sattar and Jordan, James V., Term Structure Estimation from On-the-Run Treasuries. Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=291075

Sattar Mansi (Contact Author)

Virginia Polytechnic Institute & State University ( email )

James V. Jordan

National Economic Research Associates ( email )

1255 23rd Street, NW, Suite 600
Washington, DC 20037
United States
202-466-9263 (Phone)

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