Abstract
We show that the recently developed non-parametric procedure for fitting the term structure of interest rates developed by Linton, Mammen, Nielsen, and Tanggaard (J Econ 105(1):185–223, 2001) overall performs notably better than the highly flexible McCulloch (J Finon 30:811–830, 1975) cubic spline and Fama and Bliss (Am Econ Rev 77:680–692, 1987) bootstrap methods. However, if interest is limited to the Treasury-bill region alone then the Fama–Bliss method demonstrates superior performance. We further show, via simulation, that using the estimated short rate from the Linton–Mammen–Nielsen–Tanggaard procedure as a proxy for the short rate has higher precision then the commonly used proxies of the one and three month Treasury-bill rates. It is demonstrated that this precision is important when using proxies to estimate the stochastic process governing the evolution of the short rate
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Jeffrey, A., Linton, O. & Nguyen, T. Flexible Term Structure Estimation: Which Method is Preferred?. Metrika 63, 99–122 (2006). https://doi.org/10.1007/s00184-005-0017-8
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DOI: https://doi.org/10.1007/s00184-005-0017-8