Comparative Analysis of Zero Coupon Yield Curve Estimation Methods Using JGB Price Data

Kentaro Kikuchi and Kohei Shintani
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Kentaro Kikuchi: Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kentarou.kikuchi@boj.or.jp)
Kohei Shintani: Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouhei.shintani@boj.or.jp)

No 12-E-04, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: This paper conducts a comparative analysis of the diverse methods for estimating the Japanese government bond (JGB) zero coupon yield curve (hereafter, zero curve) according to the criteria that estimation methods should meet. Previous studies propose many methods for estimating the zero curve from the market prices of coupon-bearing bonds. In estimating the JGB zero curve, however, an undesirable method may fail to accurately grasp the features of the zero curve. In order to select an appropriate estimation method for the JGB, we set the following criteria for the zero curve: (1) estimates should not fall below zero, (2) estimates should not take abnormal values, (3) estimates should have a good fit to market prices, and (4) the zero curve should have little unevenness. The method which meets these criteria enables us to estimate the zero curve with a good fit to the JGB market prices and a proper interpolation to grasp the features of the zero curve. Based on our analysis, we conclude that the method proposed in Steeley [1991] is the best in light of the criteria for the JGB price data. In fact, the zero curve based on this method can fully capture the characteristics of the JGB zero curve in a prolonged period of accommodative monetary policy.

Keywords: coupon-bearing government bond; zero coupon yield; piecewise polynomial function (search for similar items in EconPapers)
JEL-codes: C13 C14 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-fmk
Date: 2012-04
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