The estimation of nominal and real yield curves from government bonds in Israel

Zvi Wiener and Helena Pompushko

Journal of Risk Finance, 2006, vol. 7, issue 5, 488-502

Abstract: Purpose - The purpose of this research is to develop and test a mathematical method of deriving zero yield curve from market prices of government bonds. Design/methodology/approach - The method is based on a forward curve approximated by a linear (or piecewise constant) spline and should be applicable even for markets with low liquidity. The best fitting curve is derived by minimizing the penalty function. The penalty is defined as a sum of squared price discrepancies (theoretical curve based price minus market closing price) weighted by trade volume and an additional penalty for non‐smoothness of the yield curve. Findings - This method is applied to both nominal and CPI linked bonds traded in Israel (some segments of these markets have low liquidity). The resulting two yield curves are used for derivation of market expected inflation rate. Research limitations/implications - The main problems are low liquidity of some bonds and imperfect linkage to inflation in the CPI linked market. Practical implications - A stable numerical procedure applicable even in markets with low liquidity. Originality/value - Usage of forward curves as the state space for the minimization problem leads to a stable solution that fits the data very well and can be used for calculating forward rates.

Keywords: Yield curve; Inflation; Israel (search for similar items in EconPapers)
Date: 2006
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:15265940610712650

DOI: 10.1108/15265940610712650

Access Statistics for this article

Journal of Risk Finance is currently edited by Nawazish Mirza

More articles in Journal of Risk Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().