Year: 2024
Type: article
Abstract: We use a proprietary dataset of daily quotations of individual bonds from the period 2005–2018 to assess the appropriateness of three common yield curve intrapolation methods: Nelson-Siegel (NS), Diebold-Li (DL) and cubic splines. Spot (zero-coupon) yield curves derived from the methods are used to price all securities in the sample in both in-sample and out-of-sample settings. The results highlight trade-offs inherent in any empirical strategy: between flexibility and in-sample fit, between overall fit and fit in particular segments of the curve. We look at both in-sample and out-of-sample. Cubic splines offer the best in-sample fit, but out-of-sample results indicate that NS and DL curves might be a better choice for researchers interested in medium- and longer-dated securities. We also assess the usefulness of short-term interbank offered rates as proxy for the shortest part of the yield curve, finding no appreciable empirical benefit and lack of theoretical justification.
Author: Piotr Bartkiewicz
Institution: SGH Warsaw School of Economics
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W4406034062