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Interest Rate Term Structure Decomposition: An Axiomatic

Brian Barnard

Applied Economics and Finance, 2019, vol. 6, issue 1, 84-96

Abstract: The paper examines an axiomatic structural approach to term structure decomposition. From this perspective, term structure decomposition is modelled as an non-parsimonious optimization problem, with the structure delineated by constraints related to the likely attributes thereof, rather than by a linear combination of splines or functions. The motivation for the model lies in its perceived flexibility or power. Also, the model is seen as a likely candidate to implement issue-level term structure decomposition. Consequently, issue-level term structure decomposition is also briefly introduced. The power of the model is tested on a simulated and market sample. Even though it may go against notions of structure smoothness, the relationship or correlation between structure smoothness, goodness of fit, and systematic/ unsystematic risk is also touched on.

Keywords: term structure decomposition; optimization; market efficiency (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:rfa:aefjnl:v:6:y:2019:i:1:p:84-96