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An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates

David Bolder, Grahame Johnson and Adam Metzler

Staff Working Papers from Bank of Canada

Abstract: Zero-coupon interest rates are the fundamental building block of fixed-income mathematics, and as such have an extensive number of applications in both finance and economics. The risk-free government zero-coupon term structure is, however, not directly observable and needs to be generated from the prices of marketable, coupon-bearing bonds. The authors introduce the first public-domain database of constant-maturity zero-coupon yield curves for the Government of Canada bond market. They first outline the mechanics of the curve-fitting algorithm that underlie the model, and then perform some preliminary statistical analysis on the resulting yield curves. The full sample period extends from January 1986 to May 2003; it is broken down into two subsamples, reflecting the structural and macroeconomic changes that impacted the Canadian fixed-income markets over that time. The authors examine the evolution of a number of key interest rates and yield-curve measures over the period, perform a principal-components analysis of the common factors that have influenced yield changes over time, and compare holding-period returns over the sample for assets of various maturities.

Keywords: Financial markets; Interest rates; Econometric and statistical methods (search for similar items in EconPapers)
JEL-codes: C0 C6 E4 G1 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2004
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mac
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