A simple and general approach to fitting the discount curve under no-arbitrage constraints

Matthias Fengler and Lin-Yee Hin

Finance Research Letters, 2015, vol. 15, issue C, 78-84

Abstract: We suggest a simple and general approach to fitting the discount curve under no-arbitrage constraints based on a penalized shape-constrained B-spline. The approach accommodates B-splines of any order and fitting both under the L1 and the L2 loss functions. An application to US STRIPS data from 2001–2015 suggests that polynomial splines of order three and four are mandatory to obtain reasonable fits. The choice of the loss function appears to be less relevant.

Keywords: B-splines; Discount curve; No-arbitrage constraints; Monotone estimation; Yield curve (search for similar items in EconPapers)
JEL-codes: C44 C58 C61 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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Working Paper: A simple and general approach to fitting the discount curve under no-arbitrage constraints (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:15:y:2015:i:c:p:78-84

DOI: 10.1016/j.frl.2015.08.006

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