Term Structure Analysis with Big Data
Abstract: Analysis of the term structure of interest rates almost always takes a two-step approach. First, actual bond prices are summarized by interpolated synthetic zero-coupon yields, and second, a small set of these yields are used as the source data for further empirical examination. In contrast, we consider the advantages of a one-step approach that directly analyzes the universe of bond prices. To illustrate the feasibility and desirability of the onestep approach, we compare arbitrage-free dynamic term structure models estimated using both approaches. We also provide a simulation study showing that a one-step approach can extract the information in large panels of bond prices and avoid any arbitrary noise introduced from a first-stage interpolation of yields.
File format is application/pdf
Description: Full text
Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2017-09-15
Pages: 50 pages
Note: This version: September 15, 2017.