Modelling the Yield Curve with Orthonormalised Laguerre Polynomials: A Consistent Cross-Sectional and Inter-Temporal Approach

Leo Krippner

Working Papers in Economics from University of Waikato, Department of Economics

Abstract: This article proposes the orthonormalised Laguerre polynomial (OLP) model of the yield curve, a generic linear model that is both cross-sectionally consistent (that is, it reliably fits the yield curve at a given point in time), and inter-temporally consistent (that is, the cross-sectional parameters are shown to be consistent over time within the expectations hypothesis framework). The OLP model generalises the exponential-polynomial model for a single yield curve, as originally proposed by Nelson and Siegel (1987), and also allows for the simultaneous modelling of other same-currency yield curves that have instrument-specific differences (such as default risk), as in Houweling, Hoek and Kleibergen (2001). New Zealand data is used to illustrate the empirical application of the OLP model.

Keywords: yield curve; term structure; expectations hypothesis; exponential polynomial; Nelson and Siegel model (search for similar items in EconPapers)
JEL-codes: C21 C22 E43 (search for similar items in EconPapers)
Date: 2003-09-30
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