FITTING DYNAMICALLY CONSISTENT FORWARD RATE CURVES: ALGORITHM AND COMPARISON

David Wu and Robert Jarrow ()
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David Wu: Operations Research and Information Engineering, Cornell University, Ithaca, NY 14853, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2024, vol. 27, issue 05n06, 1-23

Abstract: This paper introduces a new methodology for estimating dynamically consistent forward rate curves, which are essential for obtaining arbitrage-free valuation and risk management models. Using U.S. Treasury data from January 2013 to June 2023, we fit dynamically consistent forward rates curves and test the goodness of fit between theoretical and observed prices. We compare the traditional static forward rate curve parameterizations (including Nelson–Siegel, Svensson, and cubic splines) with our new dynamically consistent methodology. The dynamically consistent forward rate curve estimates generally outperform the traditional static methods in reproducing market prices.

Keywords: Dynamically consistent term structure smoothing; HJM model; Nelson–Siegel; Svensson; cubic splines (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S0219024924500213

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