IDEAS home Printed from https://ideas.repec.org/a/rfa/aefjnl/v6y2019i1p84-96.html
   My bibliography  Save this article

Interest Rate Term Structure Decomposition: An Axiomatic

Author

Listed:
  • 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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: http://redfame.com/journal/index.php/aef/article/view/1907/4037
    Download Restriction: no
    File URL: http://redfame.com/journal/index.php/aef/article/view/1907
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
    2. 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.
    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. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    5. 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.
    6. 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.
    7. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-830, June.
    8. 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.
    9. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ganchev, Alexander, 2009. "Modeling the yield curve of spot interest rates under the conditions in Bulgaria," MPRA Paper 70048, University Library of Munich, Germany.
    2. Nymand-Andersen, Per, 2018. "Yield curve modelling and a conceptual framework for estimating yield curves: evidence from the European Central Bank’s yield curves," Statistics Paper Series 27, European Central Bank.
    3. James M. Steeley, 2008. "Testing Term Structure Estimation Methods: Evidence from the UK STRIPS Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1489-1512, October.
    4. Emma Berenguer-Carceles & Ricardo Gimeno & Juan M. Nave, 2012. "Estimation of the Term Structure of Interest Rates: Methodology and Applications," Working Papers 12.06, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
    5. Andraž, Grum, 2006. "Razvitost slovenskega trga dolžniškega kapitala in ocenitev krivulje donosnosti," MPRA Paper 4876, University Library of Munich, Germany.
    6. Yallup, Peter J., 2012. "Models of the yield curve and the curvature of the implied forward rate function," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 121-135.
    7. Asif Lakhany & Andrej Pintar & Amber Zhang, 2021. "Calibrating the Nelson-Siegel-Svensson Model by Genetic Algorithm," Papers 2108.01760, arXiv.org.
    8. Faria, Adriano & Almeida, Caio, 2018. "A hybrid spline-based parametric model for the yield curve," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 72-94.
    9. Lauren Stagnol, 2017. "Introducing global term structure in a risk parity framework," Working Papers hal-04141648, HAL.
    10. 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.
    11. Luis Eduardo Arango & Luis Fernando Melo & Diego Mauricio Vásquez, 2003. "Estimación de la estructura a plazo de las tasas de interés en Colombia," Coyuntura Económica, Fedesarrollo, vol. 33(1), pages 51-76, March.
    12. Hana Hladíková & Jarmila Radová, 2012. "Term Structure Modelling by Using Nelson-Siegel Model," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2012(2), pages 36-55.
    13. Tong, Xiaojun & He, Zhuoqiong Chong & Sun, Dongchu, 2018. "Estimating Chinese Treasury yield curves with Bayesian smoothing splines," Econometrics and Statistics, Elsevier, vol. 8(C), pages 94-124.
    14. Damir Filipovi'c & Sander Willems, 2016. "Exact Smooth Term-Structure Estimation," Papers 1606.03899, arXiv.org, revised Aug 2018.
    15. C. Emre Alper & Aras Akdemir & Kazim Kazimov, 2004. "Estimating the Term Structure of Government Securities in Turkey," Working Papers 2004/03, Bogazici University, Department of Economics.
    16. Rafael Barros de Rezende, 2011. "Giving Flexibility to the Nelson-Siegel Class of Term Structure Models," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(1), pages 27-49.
    17. Marcello Pericoli, 2014. "Real Term Structure and Inflation Compensation in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 1-42, March.
    18. Marti G. Subrahmanyam & Young Ho Eom & Jun Uno, 2000. "Credit Risk and the Pricing of Japanese Yen Interest Rate Swaps," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-069, New York University, Leonard N. Stern School of Business-.
    19. Damir Filipović & Sander Willems, 2016. "Exact Smooth Term Structure Estimation," Swiss Finance Institute Research Paper Series 16-38, Swiss Finance Institute.
    20. Gonzalo Cortazar & Eduardo S. Schwartz & Lorenzo F. Naranjo, 2007. "Term-structure estimation in markets with infrequent trading," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(4), pages 353-369.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rfa:aefjnl:v:6:y:2019:i:1:p:84-96. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Redfame publishing (email available below). General contact details of provider: https://edirc.repec.org/data/cepflch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.