TY - JOUR
T1 - A hybrid spline-based parametric model for the yield curve
AU - Faria, Adriano
AU - Almeida, Caio
N1 - Funding Information:
The second author acknowledges financial support from CNPq (Grant no. 311272/2014-2 ).
Publisher Copyright:
© 2017 Elsevier B.V.
Copyright:
Copyright 2017 Elsevier B.V., All rights reserved.
PY - 2018/1
Y1 - 2018/1
N2 - Empirical evidence indicates that both nominal and real yield curves in important markets have segmentation between their short end and their longer-maturity segments. This segmentation might affect term structure estimation, introducing distortions in longer-maturity yields, especially in parametric models. In order to deal with such segmentation, we propose a new model that combines the flexibility of spline functions with the parsimoniousness of a parametric four-factor exponential model. The short end of the yield curve is fitted using a B-spline function, while longer segments are captured by the parametric model. We illustrate the benefits of the proposed model for pricing and risk management purposes, using two examples: the real yield curve in the Brazilian government index-linked bond market, and the US Treasury nominal yield curve. We show that, in both markets, our model is simultaneously able to fit the yield curve well and to provide unbiased Value at Risk estimates for all tested portfolios of bonds, outperforming an important parametric benchmark model frequently adopted by central banks.
AB - Empirical evidence indicates that both nominal and real yield curves in important markets have segmentation between their short end and their longer-maturity segments. This segmentation might affect term structure estimation, introducing distortions in longer-maturity yields, especially in parametric models. In order to deal with such segmentation, we propose a new model that combines the flexibility of spline functions with the parsimoniousness of a parametric four-factor exponential model. The short end of the yield curve is fitted using a B-spline function, while longer segments are captured by the parametric model. We illustrate the benefits of the proposed model for pricing and risk management purposes, using two examples: the real yield curve in the Brazilian government index-linked bond market, and the US Treasury nominal yield curve. We show that, in both markets, our model is simultaneously able to fit the yield curve well and to provide unbiased Value at Risk estimates for all tested portfolios of bonds, outperforming an important parametric benchmark model frequently adopted by central banks.
KW - Curve fitting
KW - Exponential term structure models
KW - Price index
KW - Risk management
KW - Spline models
UR - http://www.scopus.com/inward/record.url?scp=85034117000&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85034117000&partnerID=8YFLogxK
U2 - 10.1016/j.jedc.2017.10.009
DO - 10.1016/j.jedc.2017.10.009
M3 - Article
AN - SCOPUS:85034117000
SN - 0165-1889
VL - 86
SP - 72
EP - 94
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
ER -