Re: Yield Curve Boostraping Improvements

Posted by newbie73 on
URL: http://quantlib.414.s1.nabble.com/Yield-Curve-Boostraping-Improvements-tp9826p9831.html

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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