# Nonparametric Smoothing of Yield Curves

Nonparametric Smoothing of Yield Curves This paper proposes a new nonparametric approach to the problem of inferring term structure estimates using coupon bond prices. The nonparametric estimator is defined on the basis of a penalized least squares criterion. The solution is a natural cubic spline, and the paper presents an iterative procedure for solving the non-linear first-order conditions. Besides smoothness, there are no a priori restrictions on the yield curve, and the position of the knots and the optimal smoothness can be determined from data. For these reasons the smoothing procedure is said to be completely data driven. The paper also demonstrates that smoothing a simple transformation of the yield curve greatly improves the stability of longer-term yield curve estimates. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

# Nonparametric Smoothing of Yield Curves

Review of Quantitative Finance and Accounting, Volume 9 (3) – Sep 29, 2004
17 pages

/lp/springer_journal/nonparametric-smoothing-of-yield-curves-OOQrMy0tZY
Publisher
Springer Journals
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008231600688
Publisher site
See Article on Publisher Site

### Abstract

This paper proposes a new nonparametric approach to the problem of inferring term structure estimates using coupon bond prices. The nonparametric estimator is defined on the basis of a penalized least squares criterion. The solution is a natural cubic spline, and the paper presents an iterative procedure for solving the non-linear first-order conditions. Besides smoothness, there are no a priori restrictions on the yield curve, and the position of the knots and the optimal smoothness can be determined from data. For these reasons the smoothing procedure is said to be completely data driven. The paper also demonstrates that smoothing a simple transformation of the yield curve greatly improves the stability of longer-term yield curve estimates.

### Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 29, 2004

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