UTS Business School

University of Technology, Sydney

Title: |
Fitting Parsimonious Yield Curve Models to Australian Coupon Bond Data |

Author(s): |
Ben Hunt |

Date of publication: |
September 1995 |

Working paper number: |
51 |

Abstract: |
This study uses a unique data set on Australian coupon bonds to test a number of yield curve models. A non-linear least squares technique is employed to directly fit four alternative, zero coupon, forward rate, yield curve models to the data. The four yield curve models tested were two, 4-parameter polynomial curves and two 3-parameter models including a Laguerre function. We show that a fourth order polynomial with the cubic term omitted best fits the data. This preferred model provides good estimates of both the forward and spot rate curves as well as producing volatility structures that accorded with our a priori expectation. The preferred, fourth order polynomial model is used as the basis of a market trading strategy. In this strategy, a model predicted underpriced bonds are purchased and a model predicted overpriced bonds are sold. This strategy is shown to be superior to a random trading strategy. There is however, little evidence of market inefficiency as transaction costs account for any profit generated by the strategy. |

Paper: |
Download (Format: PDF, Size: 1.0 Mb) |

Known citations: |
Bilhastre, Â. G, 2009, "Fitting the Yield Curve", Working Paper, University of Lisbon. Hunt, B. and Terry, C., 1998, "Zero-Coupon Yield Curve Estimation; A Principal Component, Polynomial Approach", Working Paper: 81, Finance Discipline Group, University of Technology, Sydney. Kalev, P. S., 2001, Kalev, P. S., 2004, "Estimating and Interpreting Zero Coupon and Forward Rates: Australia, 1992-2001", Working Paper. Krippner, L., 2003, "Modelling the Yield Curve with Orthonomalised Laguerre Polynomials: An Intertemporally Consistent Approach with an Economic Interpretation", Working Papers in Economics 03/01, University of Waikato, Department of Economics.Krippner, L., 2003, "Modelling the Yield Curve with Orthonormalised Laguerre Polynomials: A Consistent Cross-Sectional and Inter-Temporal Approach", Working Papers in Economics 03/02, University of Waikato, Department of Economics. Krippner, L., 2005, "An Intertemporally-Consistent and Arbitrage-Free Version of the Nelson and Siegel Class of Yield Curve Models", Working Papers in Economics 05/01, University of Waikato, Department of Economics. Krippner, L. 2006, "A Theoretical Consistent Version of the Nelson and Siegel Class of Yield Curve Models", Marrero, S. M., 1998, |