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.
Rudebusch, Glenn D., Jens H. E. Christensen, and Martin M. Andreasen. 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