The effect of parallel OTC-DVP bond market introduction on yield curve volatility

Andraž Grum

MPRA Paper from University Library of Munich, Germany

Abstract: The goal of this paper is to analyze the effect of OTC-DVP (over the counter delivery versus payment) fixed income market introduction in Slovenia on the term structure estimation and on the volatility of zero coupon yields and forward interest rates. For the purpose of the analysis Slovenian zero coupon and forward curves were estimated. The model used for yield curve estimation was Nelson-Siegel model as it proved to be superior in terms of goodness of fit, to other statistical methods of yield curve estimation, namely: Svensson model, B-splines model, smoothing B-splines model and Merrill Lynch exponential splines model. Results of analysis show that OTC-DVP bond market introduction (as parallel bond market) has improved the information content of bond prices for term structure estimation purpose. The volatility of spot and forward rates for mid and long remind maturities has fallen with the highest density on the longest maturity segment.

Keywords: OTC-DVP bond market; term structure estimation; splines; Nelson-Siegel model; yield volatility (search for similar items in EconPapers)
JEL-codes: C10 C61 G12 G28 (search for similar items in EconPapers)
Date: 2006-04
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Citations: View citations in EconPapers (1)

Published in The Proceedings of Rijeka Faculty of Economics – Journal of Economics and Business 1.24(2006): pp. 123-140

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