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Term structure of interest rates estimation using rational Chebyshev functions

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  • Polychronis Manousopoulos
  • Michalis Michalopoulos

Abstract

We present a novel method for modeling yield curves using rational Chebyshev functions. Our motivation is based on both their suitable mathematical properties as well as their successful application record, mainly in nonfinancial areas. We provide an interpretation of the proposed model in terms of a level–slope–curvature perspective, and we indicate methods for identifying the model’s parameters based on this interpretation. We present the results of in-sample and out-of-sample tests of the proposed model in comparison with popular parsimonious models. The tests indicate that the proposed model is competitive in terms of its performance as well as its properties. Copyright Springer-Verlag Italia 2015

Suggested Citation

  • Polychronis Manousopoulos & Michalis Michalopoulos, 2015. "Term structure of interest rates estimation using rational Chebyshev functions," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 38(2), pages 119-146, October.
    • Handle: RePEc:spr:decfin:v:38:y:2015:i:2:p:119-146
    DOI: 10.1007/s10203-014-0161-6
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    References listed on IDEAS

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    1. Koopman, Siem Jan & Mallee, Max I. P. & Van der Wel, Michel, 2010. "Analyzing the Term Structure of Interest Rates Using the Dynamic Nelson–Siegel Model With Time-Varying Parameters," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(3), pages 329-343.
    2. Diebold, Francis X. & Li, Canlin & Yue, Vivian Z., 2008. "Global yield curve dynamics and interactions: A dynamic Nelson-Siegel approach," Journal of Econometrics, Elsevier, vol. 146(2), pages 351-363, October.
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    9. Pham, Toan M., 1998. "Estimation of the term structure of interest rates: an international perspective," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 265-283, September.
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    15. Nyholm, Ken & Vidova-Koleva, Rositsa, 2010. "Nelson-Siegel, affine and quadratic yield curve specifications: which one is better at forecasting?," Working Paper Series 1205, European Central Bank.
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    More about this item

    Keywords

    Yield curve; Term structure of interest rates; Rational Chebyshev functions; C51; E43; G12;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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