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Interest Rate Term Structure Decomposition: An Axiomatic

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  • Brian Barnard

Abstract

The paper examines an axiomatic structural approach to term structure decomposition. From this perspective, term structure decomposition is modelled as an non-parsimonious optimization problem, with the structure delineated by constraints related to the likely attributes thereof, rather than by a linear combination of splines or functions. The motivation for the model lies in its perceived flexibility or power. Also, the model is seen as a likely candidate to implement issue-level term structure decomposition. Consequently, issue-level term structure decomposition is also briefly introduced. The power of the model is tested on a simulated and market sample. Even though it may go against notions of structure smoothness, the relationship or correlation between structure smoothness, goodness of fit, and systematic/ unsystematic risk is also touched on.

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  • Brian Barnard, 2019. "Interest Rate Term Structure Decomposition: An Axiomatic," Applied Economics and Finance, Redfame publishing, vol. 6(1), pages 84-96, January.
    • Handle: RePEc:rfa:aefjnl:v:6:y:2019:i:1:p:84-96
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    References listed on IDEAS

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    1. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
    2. David Bolder & Scott Gusba, 2002. "Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada," Staff Working Papers 02-29, Bank of Canada.
    3. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722, Elsevier.
    4. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
    5. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    6. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-830, June.
    7. David Bolder & Grahame Johnson & Adam Metzler, 2004. "An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates," Staff Working Papers 04-48, Bank of Canada.
    8. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
    9. Gauthier, Geneviève & Simonato, Jean-Guy, 2012. "Linearized Nelson–Siegel and Svensson models for the estimation of spot interest rates," European Journal of Operational Research, Elsevier, vol. 219(2), pages 442-451.
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    Cited by:

    1. Brian Barnard, 2019. "Interest Rate Term Structure Decomposition at the Instrument Level," Applied Economics and Finance, Redfame publishing, vol. 6(3), pages 7-27, May.

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