A Non-parametric Approach to Term Structure Estimation

Abstract

Term structures of interest rates play an important role in finance and are used for pricing interest rate dependant securities. In this paper a new approach to term structure estimation is presented that has a number of advantages over current practice:

• it does not depend on any parametric model, and therefore, does allow for arbitrary shapes of zero coupon curves and is widely applicable;

• only a small set of data is required;

• it is extremely robust; and

• with respect to the common trade-off between accuracy and smoothness it is optimal.