Spline Methods for Extracting Interest Rate Curves from Coupon Bond Prices

Federal Reserve Bank of Atlanta Working Paper 97-10

23 Pages Posted: 13 May 1998

Date Written: November 1997

Abstract

Cubic splines have long been used to extract the discount, yield, and forward rate curves from coupon bond data. McCulloch used regression splines to estimate the discount function, and, more recently, Fisher, Nychka, and Zervos used smoothed splines, with the roughness penalty selected by generalized cross-validation, to estimate the forward rate curve. I propose using a smoothed spline but with a roughness penalty that can vary across maturities, to estimate the forward rate curve. This method is tested against the methods of McCulloch and Fisher, Nychka, and Zervos using monthly bond data from 1970 through 1995.

JEL Classification: G12, C13

Suggested Citation

Waggoner, Daniel F., Spline Methods for Extracting Interest Rate Curves from Coupon Bond Prices (November 1997). Federal Reserve Bank of Atlanta Working Paper 97-10, Available at SSRN: https://ssrn.com/abstract=86789 or http://dx.doi.org/10.2139/ssrn.86789

Daniel F. Waggoner (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-521-8278 (Phone)

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