Reconstructing the Yield Curve

85 Pages Posted: 28 Nov 2018 Last revised: 30 Dec 2020

See all articles by Yan Liu

Yan Liu

Purdue University

Jing Cynthia Wu

University of Notre Dame - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 21, 2019

Abstract

The constant-maturity zero-coupon Treasury yield curve is one of the most studied datasets. We reconstruct the yield curve using a non-parametric kernel-smoothing method with a novel adaptive bandwidth specifically designed to fit the Treasury yield curve. Our curve is globally smooth while still capturing important local variation. Economically, we show that applying our data leads to different conclusions from using the leading alternative data of Gurkaynak et al. (2007) (GSW) when we repeat two popular studies of Cochrane and Piazzesi (2005) and Giglio and Kelly (2018). Statistically, we show our dataset preserves information in the raw data and has much smaller pricing errors than GSW. Our new yield curve is maintained and updated online, complemented by bandwidths that summarize information content in the raw data.

Keywords: yield curve, non-parametric, term structure, excess volatility, return forecasting

JEL Classification: G12, C58, C13, C14

Suggested Citation

Liu, Yan and Wu, Jing Cynthia, Reconstructing the Yield Curve (January 21, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3286785 or http://dx.doi.org/10.2139/ssrn.3286785

Yan Liu (Contact Author)

Purdue University ( email )

West Lafayette, IN 47907-1310
United States

HOME PAGE: http://yliu1.com

Jing Cynthia Wu

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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