Term Structure Analysis with Big Data: One-Step Estimation Using Bond Prices

By M. M. Andreasen, Jens H. E. Christensen, Glenn D. Rudebusch. Journal of Econometrics, 2017

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Analysis of the term structure of interest rates almost always takes a two-step approach. First, actual bond prices are summarized by interpolated synthetic zero-coupon yields, and second, a small set of these yields are used as the source data for further empirical examination. In contrast, we consider the advantages of a one-step approach that directly analyzes the universe of bond prices. To illustrate the feasibility and desirability of the onestep approach, we compare arbitrage-free dynamic term structure models estimated using both approaches. We also provide a simulation study showing that a one-step approach can extract the information in large panels of bond prices and avoid any arbitrary noise introduced from a first-stage interpolation of yields.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/93cc5f3d7b8d7205cfa12c2468ea86da7c4243cb