This research received financial support from the Leverhulme Trust, Personal Research Fellowship no. 10505. I am very grateful for this funding and also for the support of H.M.Treasury's Debt Management Office. This article has benefited from the generous and wise counsel of the anonymous referee, and from discussions with Mark Deacon and colleagues at the D.M.O., Mike Joyce and colleagues at the Bank of England, and Clint Cummins at TSP International. I am very grateful to them all.
Testing Term Structure Estimation Methods: Evidence from the UK STRIPS Market
Article first published online: 20 SEP 2008
© 2008 The Ohio State University
Journal of Money, Credit and Banking
Volume 40, Issue 7, pages 1489–1512, October 2008
How to Cite
STEELEY, J. M. (2008), Testing Term Structure Estimation Methods: Evidence from the UK STRIPS Market. Journal of Money, Credit and Banking, 40: 1489–1512. doi: 10.1111/j.1538-4616.2008.00168.x
- Issue published online: 20 SEP 2008
- Article first published online: 20 SEP 2008
- Received March 7, 2005; and accepted in revised form February 2, 2008.
- term structure;
Prices and yields of UK government zero-coupon bonds are used to test alternative yield curve estimation models. Zero-coupon bonds permit a more pure comparison, as the models are providing only the interpolation service and also not making estimation feasible. It is found that better yield curves estimates are obtained by fitting to the yield curve directly rather than fitting first to the discount function. A simple procedure to set the smoothness of the fitted curves is developed, and a positive relationship between over-smoothness and the fitting error is identified. A cubic spline function fitted directly to the yield curve provides the best overall balance of fitting error and smoothness, both along the yield curve and within local maturity regions.