Approximating term structure of interest rates using cubic L1 splines

Nan Chieh Chiu; Shu Cherng Fang; John E. Lavery; Jen Yen Lin; Yong Wang

doi:10.1016/j.ejor.2006.12.008

Approximating term structure of interest rates using cubic L₁ splines

Nan Chieh Chiu, Shu Cherng Fang, John E. Lavery, Jen Yen Lin, Yong Wang

Department of Industrial and Information Management

Research output: Contribution to journal › Article › peer-review

18 Citations (Scopus)

Abstract

Classical spline fitting methods for estimating the term structure of interest rates have been criticized for generating highly fluctuating fitting curves for bond price and discount function. In addition, the performance of these methods usually relies heavily on parameter tuning involving human judgement. To overcome these drawbacks, a recently developed cubic L₁ spline model is proposed for term structure analysis. Cubic L₁ splines preserve the shape of the data, exhibit no extraneous oscillation and have small fitting errors. Cubic L₁ splines are tested using a set of real financial data and compared with the widely used B-splines.

Original language	English
Pages (from-to)	990-1004
Number of pages	15
Journal	European Journal of Operational Research
Volume	184
Issue number	3
DOIs	https://doi.org/10.1016/j.ejor.2006.12.008
Publication status	Published - 2008 Feb 1

All Science Journal Classification (ASJC) codes

Computer Science(all)
Modelling and Simulation
Management Science and Operations Research
Information Systems and Management

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10.1016/j.ejor.2006.12.008

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title = "Approximating term structure of interest rates using cubic L1 splines",

abstract = "Classical spline fitting methods for estimating the term structure of interest rates have been criticized for generating highly fluctuating fitting curves for bond price and discount function. In addition, the performance of these methods usually relies heavily on parameter tuning involving human judgement. To overcome these drawbacks, a recently developed cubic L1 spline model is proposed for term structure analysis. Cubic L1 splines preserve the shape of the data, exhibit no extraneous oscillation and have small fitting errors. Cubic L1 splines are tested using a set of real financial data and compared with the widely used B-splines.",

author = "Chiu, {Nan Chieh} and Fang, {Shu Cherng} and Lavery, {John E.} and Lin, {Jen Yen} and Yong Wang",

note = "Funding Information: This work has been supported by the research Grant #W911NF-04-D-0003 of the US Army Research Office and Grant #DMI-0553310 of the US National Science Foundation.",

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AU - Chiu, Nan Chieh

AU - Fang, Shu Cherng

AU - Lavery, John E.

AU - Lin, Jen Yen

AU - Wang, Yong

N1 - Funding Information: This work has been supported by the research Grant #W911NF-04-D-0003 of the US Army Research Office and Grant #DMI-0553310 of the US National Science Foundation.

PY - 2008/2/1

Y1 - 2008/2/1

N2 - Classical spline fitting methods for estimating the term structure of interest rates have been criticized for generating highly fluctuating fitting curves for bond price and discount function. In addition, the performance of these methods usually relies heavily on parameter tuning involving human judgement. To overcome these drawbacks, a recently developed cubic L1 spline model is proposed for term structure analysis. Cubic L1 splines preserve the shape of the data, exhibit no extraneous oscillation and have small fitting errors. Cubic L1 splines are tested using a set of real financial data and compared with the widely used B-splines.

AB - Classical spline fitting methods for estimating the term structure of interest rates have been criticized for generating highly fluctuating fitting curves for bond price and discount function. In addition, the performance of these methods usually relies heavily on parameter tuning involving human judgement. To overcome these drawbacks, a recently developed cubic L1 spline model is proposed for term structure analysis. Cubic L1 splines preserve the shape of the data, exhibit no extraneous oscillation and have small fitting errors. Cubic L1 splines are tested using a set of real financial data and compared with the widely used B-splines.

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Approximating term structure of interest rates using cubic L₁ splines

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