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Fitting the term structure of interest rates for Taiwanese government bonds

Authors
Journal
Journal of Multinational Financial Management
1042-444X
Publisher
Elsevier
Publication Date
Volume
9
Identifiers
DOI: 10.1016/s1042-444x(99)00006-7
Keywords
  • Term Structure Of Interest Rates
  • B-Spline Approximation
  • Discount Fitting Model
  • Spot Fitting Model
  • Forward Fitting Model
Disciplines
  • Economics
  • Political Science

Abstract

Abstract The term structure of interest rates provides a basis for pricing fixed-income securities and interest rate derivative securities as well as other capital assets. Unfortunately, the term structure is not always directly observable because most of the substitutes for default-free bonds are not pure discount bonds. We use curve fitting techniques with the observed government coupon bond prices to estimate the term structure. In this paper, the B-spline approximation is used to estimate the Taiwanese Government Bond (TGB) term structure. We apply the B-spline functions to approximate the discount function, spot yield curve, and forward yield curve respectively. Among the three approaches, the discount fitting approach and the spot fitting approach are reasonable and reliable, but the spot fitting approach achieves the most suitable fit. Using this methodology, we can investigate term structure fitting problems, identify coupon effects, and analyze factors which drive term structure fluctuations in the TGB market.

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