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Last
updated:
April 21, 2000
Design & Content:
Csaba Horvath
| Yield Curve Estimation and Analysis: why, how and where? | |
What are the purposes and advantages of the zero coupon yield curve?A
great advantage the zero coupon yield curve has over other types
of yield curves (par yield or YTM) is that it is suitable for generating
the forward rates implied by the spot curve easily and correctly.
These implicit forward rates (IFR) are the market participants'
forecasts concerning future interest rates based on the data of
the given point of time.
That
is, implied forward rates reflect the expectations of market participants
about future interest rates.
In
order to draw the yield curves showing the most frequently used
yields to maturity (YTM) or the internal rates of return (IRR),
all we had to do was to calculate the IRR of each bond (in the case
of discount securities, it is of course the same as the zero coupon
type yield) and plot it against the time.
Unfortunately,
this type of yield curve is not suitable for complex analyses, either,
as IRR's belong to bonds having specific cash flow structures and,
in themselves, do not tell anything about the time value of money
and the maturity structure of interest rates. We should not rely
on them since IRR's are complex averages of zero coupon yields and
will not show the shape of the yield curve.
Yield Curve Analysis: a case study of Hungary This
page is devoted to follow the trends of Hungary's rapidly growing
capital market, namely the evolution of the yield curve on the Hungarian
government bond market.
If you try to find a correct Hungarian yield curve (I mean a zero coupon type, not only a YTM-curve, which is published by the Hungarian Government Debt Management Agency and REUTERS Hungary), you will realize that such data was not publicly available until now. But from now on... Sample resultsAnalysis
of yield curves based on the quotations of the primary dealer's
via REUTERS (page HUBEST1..4) by using several types of
interpolation (polinomial, spline, Nelson-Siegel, Svensson)
was carried out by using ZCalc zero coupon
yield curve estimation software. The curves show the price data
of discount treasury bills and government bonds bearing fixed interest
that belong to the primary dealer system per day of quotation. The
longest term of maturity of government bonds included in the analysis
was 10 years originally.
The results of the Svensson method are
available below.
Status of the researchI wrote my thesis about the comparison and application of alternative yield curve optimization methods on the Hungarian market. The emphasis was put on the comparison of the estimation methods.In the near future I plan to provide a detailed description and data set, the extent of which depends only on feedbacks. |
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