Skip to main content

The estimation of nominal and real yield curves from government bonds in Israel

Buy Article:

$46.75 plus tax (Refund Policy)

Purpose ? The purpose of this research is to develop and test a mathematical method of deriving zero yield curve from market prices of government bonds. Design/methodology/approach ? The method is based on a forward curve approximated by a linear (or piecewise constant) spline and should be applicable even for markets with low liquidity. The best fitting curve is derived by minimizing the penalty function. The penalty is defined as a sum of squared price discrepancies (theoretical curve based price minus market closing price) weighted by trade volume and an additional penalty for non-smoothness of the yield curve. Findings ? This method is applied to both nominal and CPI linked bonds traded in Israel (some segments of these markets have low liquidity). The resulting two yield curves are used for derivation of market expected inflation rate. Research limitations/implications ? The main problems are low liquidity of some bonds and imperfect linkage to inflation in the CPI linked market. Practical implications ? A stable numerical procedure applicable even in markets with low liquidity. Originality/value ? Usage of forward curves as the state space for the minimization problem leads to a stable solution that fits the data very well and can be used for calculating forward rates.
No Reference information available - sign in for access.
No Citation information available - sign in for access.
No Supplementary Data.
No Data/Media
No Metrics

Keywords: Inflation; Israel; Yield curve

Document Type: Research Article

Publication date: 2006-10-01

  • Access Key
  • Free content
  • Partial Free content
  • New content
  • Open access content
  • Partial Open access content
  • Subscribed content
  • Partial Subscribed content
  • Free trial content
Cookie Policy
Cookie Policy
Ingenta Connect website makes use of cookies so as to keep track of data that you have filled in. I am Happy with this Find out more