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Publication Details
AFRICAN RESEARCH NEXUS
SHINING A SPOTLIGHT ON AFRICAN RESEARCH
economics, econometrics and finance
Interpolation methods for curve construction
Applied Mathematical Finance, Volume 13, No. 2, Year 2006
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Description
This paper surveys a wide selection of the interpolation algorithms that are in use in financial markets for construction of curves such as forward curves, basis curves, and most importantly, yield curves. In the case of yield curves the issue of bootstrapping is reviewed and how the interpolation algorithm should be intimately connected to the bootstrap itself is discussed. The criterion for inclusion in this survey is that the method has been implemented by a software vendor (or indeed an inhouse developer) as a viable option for yield curve interpolation. As will be seen, many of these methods suffer from problems: they posit unreasonable expections, or are not even necessarily arbitrage free. Moreover, many methods lead one to derive hedging strategies that are not intuitively reasonable. In the last sections, two new interpolation methods (the monotone convex method and the minimal method) are introduced, which it is believed overcome many of the problems highlighted with the other methods discussed in the earlier sections. © 2006 Taylor & Francis.
Authors & Co-Authors
Hagan, Patrick S.
United States, New York
Bloomberg L.p.
West, Graeme
South Africa, Johannesburg
University of the Witwatersrand
Statistics
Citations: 188
Authors: 2
Affiliations: 2
Identifiers
Doi:
10.1080/13504860500396032
ISSN:
1350486X
e-ISSN:
14664313
Study Design
Cross Sectional Study
Study Approach
Quantitative