Evolving Yield Curves in the Real-World Measures: A Semi-Parametric Approach

Posted: 25 Apr 2005

See all articles by Riccardo Rebonato

Riccardo Rebonato

Royal Bank of Scotland

Sukhdeep Mahal

Royal Bank of Scotland

Mark S. Joshi

University of Melbourne - Centre for Actuarial Studies (deceased)

Lars-Dierk Buchholz

Independent

Ken Nyholm

European Central Bank (ECB)

Abstract

In this paper, we show how to evolve a yield curve over time horizons of the order of years using a simple but effective semi-parametric method. The proposed technique preserves in the limit all the eigenvalues and eigenvectors of the observed changes in yields. It also recovers in a satisfactory way several important statistical features (unconditional variance, serial autocorrelation, distribution of curvatures, eigenvectors) of the real-world data. A simple financial explanation can be provided for the methodology. The possible financial applications are discussed.

Keywords: Yield curve, semi-parametric, eigenvalues, eigenvectors

Suggested Citation

Rebonato, Riccardo and Mahal, Sukhdeep and Joshi, Mark and Buchholz, Lars-Dierk and Nyholm, Ken, Evolving Yield Curves in the Real-World Measures: A Semi-Parametric Approach. Journal of Risk, Vol. 7, No. 3, pp. 29-62, Spring 2005, Available at SSRN: https://ssrn.com/abstract=708106

Riccardo Rebonato (Contact Author)

Royal Bank of Scotland ( email )

No Address Available
United States

Sukhdeep Mahal

Royal Bank of Scotland ( email )

No Address Available
United States

Mark Joshi

University of Melbourne - Centre for Actuarial Studies (deceased) ( email )

Melbourne, 3010
Australia

Lars-Dierk Buchholz

Independent ( email )

No Address Available
United States

Ken Nyholm

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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