Re: Wobbly, non-monotonic discount curve

Posted by Peter Caspers-4 on Nov 27, 2014; 9:45pm
URL: http://quantlib.414.s1.nabble.com/Wobbly-non-monotonic-discount-curve-tp16085p16086.html

Hi Pascal,

this is well explained in Hagan, West: Methods for constructing a
yield curve (in particular have a look into sections 4.4 and 4.5). You
can get the paper e.g. from here

http://www.math.ku.dk/~rolf/HaganWest.pdf

best regards
Peter

On 27 November 2014 at 17:53, Pascal Haakmat <[hidden email]> wrote:

> Hi,
>
> When I build a discount curve using PiecewiseLinearForward (i.e. the
> SWIG binding for PiecewiseYieldCurve with Linear interpolator and
> ForwardRate traits), I get discount values that do not monotonically
> decrease. This behavior does not occur when using PiecewiseFlatForward
> (i.e. a PiecewiseYieldCurve with BackwardFlat interpolator and
> ForwardRate traits).
>
> I've captured screenshots graphing discount factors and zero rates by year:
>
> PiecewiseLinearForward: http://imgur.com/WiSiKnY
> PiecewiseFlatForward: http://imgur.com/wd6tP8r
>
> What could account for the wobbly behavior in the PiecewiseLinearForward
> graph?
>
> The input data is as follows. Quotes <1Y are passed using a
> DepositRateHelper, >=1Y using a SwapRateHelper.
>
> 1D    0.0036
> 6M    0.0036999999999999997
> 1Y    0.0057
> 2Y    0.0077
> 3Y    0.009699999999999999
> 4Y    0.011699999999999999
> 5Y    0.013699999999999999
> 6Y    0.0157
> 7Y    0.0177
> 8Y    0.0197
> 9Y    0.0217
> 10Y    0.0237
> 11Y    0.0247
> 12Y    0.0257
> 13Y    0.026699999999999998
> 14Y    0.0277
> 15Y    0.0287
> 16Y    0.0297
> 17Y    0.030699999999999998
> 18Y    0.031700000000000006
> 19Y    0.0327
> 20Y    0.0337
> 25Y    0.0327
> 30Y    0.031700000000000006
> 40Y    0.030699999999999998
> 50Y    0.0297
> 60Y    0.0297
> 70Y    0.0297
> 80Y    0.0297
> 90Y    0.0297
> 100Y    0.0297
>
> Thanks,
> Pascal
>
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