2017-21 | September 2017
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Term Structure Analysis with Big Data
Analysis of the term structure of interest rates almost always takes a two-step approach. First, actual bond prices are summarized by interpolated synthetic zero-coupon yields, and second, a small set of these yields are used as the source data for further empirical examination. In contrast, we consider the advantages of a one-step approach that directly analyzes the universe of bond prices. To illustrate the feasibility and desirability of the onestep approach, we compare arbitrage-free dynamic term structure models estimated using both approaches. We also provide a simulation study showing that a one-step approach can extract the information in large panels of bond prices and avoid any arbitrary noise introduced from a first-stage interpolation of yields.
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Andreasen, Martin M, Jens H. E. Christensen, and Glenn D. Rudebusch. 2017. "Term Structure Analysis with Big Data," Federal Reserve Bank of San Francisco Working Paper 2017-21. Available at https://doi.org/10.24148/wp2017-21