Fitting Forward Rates to Market Data

36 Pages Posted: 26 Jun 2007

See all articles by Thomas Coleman

Thomas Coleman

University of Chicago - Harris School of Public Policy; Close Mountain Advisors LLC

Date Written: January 27, 1998

Abstract

Fitting the forward curve to market data forms the foundation for most of modern fixed income capital markets. This paper outlines a general framework for fitting the forward curve to market data. We then discuss three particular functional forms. The first two, piece-wise constant forward rates and piece-wise linear zero rates, are simple and commonly used in the markets. The third functional form, piece-wise linear forward rates, retains much of the simplicity and ease of use from the first two, while solving a problem (large jumps in the instantaneous forward rates) exhibited by them. Results are reported for US dollar swap curves for October 1994 and June 1997.

Keywords: Forward Curve, Forward Rates, Yield Curve, Term Structure of Interest Rates

JEL Classification: G10, G12

Suggested Citation

Coleman, Thomas, Fitting Forward Rates to Market Data (January 27, 1998). Available at SSRN: https://ssrn.com/abstract=994870 or http://dx.doi.org/10.2139/ssrn.994870

Thomas Coleman (Contact Author)

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Close Mountain Advisors LLC ( email )

19 Davenport Ave.
Unit B
Greenwich, CT 06830
United States

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