Estimating the Term Structure of Interest Rates

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 01 July 1994

Working Paper No. 24
By Mark Deacon and Andrew Derry

This paper examines various techniques used to estimate the term structure of interest rates from the prices of government bonds; in particular comparing the current Bank of England model with two approaches suggested in the academic literature. There are two main aspects of this problem: estimating the relationship between bond yields and maturity, and the relationship between bond yields and coupon. The paper outlines how these problems are approached by the three models, and compares them on both theoretical and practical grounds. It concludes that there is a trade-off between theoretical rigour and practical considerations. 

PDFEstimating the Term Structure of Interest Rates

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