Re: Yield Curve Boostraping Improvements

Posted by Bianchetti Marco-2 on
URL: http://quantlib.414.s1.nabble.com/Yield-Curve-Boostraping-Improvements-tp9826p9827.html

Yes, I confirm the Hagan-West paper as a key reference.

Luis, is the method you mention published somewhere ?
Ciao

Marco

 

-----Original Message-----
From: [hidden email] [mailto:[hidden email]] On Behalf Of Simon Ibbotson
Sent: 02 October 2007 15:03
To: newbie73
Cc: [hidden email]
Subject: Re: [Quantlib-dev] Yield Curve Boostraping Improvements

You might want to examine the paper by Hagan&West on smooth yieldcurve construction. Their convex monotone spline method gives great results.

 

Simon

 

On 10/2/07, newbie73 <[hidden email]> wrote:

The choppy forward curves appear regardless of which interpolation method is
used.  The term structure of 3m or 6m forward rates results in a saw-tooth
term structure which deviates from market by huge amounts.

Regarding the knot points, I was referring to picking maturities that do not
necessarily correspond with the chosen instruments.  The methodology we use
here treats the area between each knot point as its own curve (or curve
function), so you end up with many separate curves which segment the yield
curve which are then combined to ensure smooth forward curve generation.

The technique itself is quite old and was developed by Lehman in the late
80s, but works well in most cases I've encountered.

- Luis


Luigi Ballabio wrote:

>
> On Mon, 2007-10-01 at 07:20 -0700, newbie73 wrote:
>
>> So far I've been quite happy with the functionality in the QuantLib
>> library - I'd like to start using it to compare to market pricing.
>> I've found that the curve stripping methodology produces extremely
>> jagged forward curves which result in poor pricing of several market
>> structures.
>
> Does this depend on the chosen interpolation?
>
>> Also, some algorithmic help in dynamically selecting knot points would be
>> much appreciated as well.  The basic idea is the creation of a smooth
>> interpolation method for a selected set of knot points for a given curve.
>
> "Selecting knot points" as in "choosing which instruments to use among
> the available ones" (which is what Nando referred to) or as in "choosing
> a set of knots freely, i.e., not necessarily corresponding to instrument
> maturities"?
>
> Later,
>       Luigi
>
>
> --
>
> This gubblick contains many nonsklarkish English flutzpahs, but the
> overall pluggandisp can be glorked from context.
> -- David Moser
>
>
>
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