TAILIEUCHUNG - Spline Methods for Extracting Interest Rate Curves from Coupon Bond Prices

Brazil has a relatively low level of domestic savings. Hausmann (2008) argues that Brazil’s low domestic savings is the most binding constraint to growth and the reason for its high real interest rates. A similar argument about the effect of low savings on real interest rates is made by Fraga (2005). Miranda and Muinhos (2003) refer to this argument as well, but do not test it empirically. The intuition behind this argument is compelling. According to the classical investment-savings theory, if investment demand exceeds the supply of domestic savings, the equilibrium real interest rate increases. While in an open economy. | Spline Methods for Extracting Interest Rate Curves from Coupon Bond Prices Daniel F. Waggoner Federal Reserve Bank of Atlanta Working Paper 97-10 November 1997 Abstract Cubic splines have long been used to extract the discount yield and forward rate curves from coupon bond data. McCulloch used regression splines to estimate the discount function and more recently Fisher Nychka and Zervos used smoothed splines with the roughness penalty selected by generalized cross-validation to estimate the forward rate curve. I propose using a smoothed spline but with a roughness penalty that can vary across maturities to estimate the forward rate curve. This method is tested against the methods of McCulloch and Fisher Nychka and Zervos using monthly bond data from 1970 through 1995. JEL classification G12 C13 Key words term structure smoothing splines generalized cross-validation The author thanks Rob Bliss for his many helpful suggestions concerning variable roughness penalties and Mark Fisher for providing code and help in implementing the smoothed spline approach. The views expressed here are those of the author and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author s responsibility. Please address questions regarding content to Daniel F. Waggoner Senior Quantitative Analyst Federal Reserve Bank of Atlanta 104 Marietta Street . Atlanta Georgia 30303-2713 404 521-8278 404 521-8956 fax . waggoner@. Questions regarding subscriptions to the Federal Reserve Bank of Atlanta working paper series should be addressed to the Public Affairs Department Federal Reserve Bank of Atlanta 104 Marietta Street . Atlanta Georgia 30303-2713 404 521-8020. The full text of this paper may be downloaded in PDF format from the Atlanta Fed s World-Wide Web site at http publica work_papers . Spline Methods for Extracting Interest Rate Curves from Coupon Bond Prices Section 1 .

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