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CONSISTENT YIELD CURVE PREDICTION

Published online by Cambridge University Press:  05 February 2016

Josef Teichmann  and
Mario V. Wüthrich
Josef Teichmann*
Affiliation:
ETH Zurich, Department of Mathematics, 8092 Zurich, Switzerland
Mario V. Wüthrich
Affiliation:
ETH Zurich, RiskLab, Department of Mathematics, 8092 Zurich, Switzerland E-Mail: mario.wuethrich@math.ethz.ch
*
E-Mail: jteichma@math.ethz.ch
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Abstract

We present an arbitrage-free non-parametric yield curve prediction model which takes the full discretized yield curve data as input state variable. Absence of arbitrage is a particularly important model feature for prediction models in case of highly correlated data as, for instance, interest rates. Furthermore, the model structure allows to separate constructing the daily yield curve from estimating its volatility structure and from calibrating the market prices of risk. The empirical part includes tests on modeling assumptions, out-of-sample back-testing and a comparison with the Vasiček (1977) short-rate model.

Keywords

Yield curve predictionno-arbitrageHeath–Jarrow–Morton type modelvolatility scaling factors and return directions
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 46 , Issue 2 , May 2016 , pp. 191 - 224
Copyright
Copyright © Astin Bulletin 2016 

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