Reconstructing the yield curve

By Yan Liu, J. Wu. Journal of Financial Economics, 2020

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Abstract The constant maturity zero-coupon yield curve for the US Treasuries is one of the most studied datasets. We construct a new yield curve using a non-parametric kernel-smoothing method with a novel adaptive bandwidth specifically designed to fit the Treasury yields. Our curve is globally smooth while still capturing important local variation. Economically, we show that applying our data leads to different conclusions from using the leading alternative data of Gurkaynak et al. (2007) (GSW) when we repeat two popular studies of Cochrane and Piazzesi (2005) and Giglio and Kelly (2018). Statistically, we show our dataset preserves information in the raw data and has much smaller pricing errors than GSW. Our new yield curve is maintained and updated online, complemented by bandwidths that summarize information content in the raw data.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/e275daeb625d3fbdc2dab970282373a00d8f6b4c