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This quote has been added to our May 22, 2009 "Great Quotations" blog entry, but it hits so close to home we repeat it here.

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In part 10 of this series on yield curve smoothing, we included the maximum smoothness forward rate approach in our comparison of 23 different smoothing techniques, both in terms of smoothness and “tension” or length of the resulting forward and yield curves.  In each of our worked examples, we showed how to derive unique forward rate curves and yield curves based on the same set of sample data.  This sample data assumed that we had observable zero coupon yields or zero coupon bond prices to use as inputs.  At most maturities, this will not be the case and the only observable inputs will be coupon-bearing bond prices.  In this post, we show how to use coupon-bearing bond prices to derive maximum smoothness forward rates and yields.  The same approach can be applied to the 22 other smoothing techniques summarized in Part 10 of this series.

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Over the three day Martin Luther King holiday in the USA, another event took place in Santiago that brought a smile to my face.  This blog is an appreciation of one of my favorite people, Sebastián Piñera, newly elected President of Chile.

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In the first 10 installments of this series on yield curve smoothing, we committed the most common sin there is in the yield curve smoothing literature.  We used one set of “made up” data instead of hundreds or thousands of real data points to judge the performance of yield curve smoothing techniques.  In this blog, we explain why the test proposed by David Shimko is essential to judging the accuracy and realism of yield curve smoothing techniques.  We dust off some old yield data from the attic to illustrate how the test works.

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After riding up Mauna Kea volcano yesterday, Lance Armstrong is getting ready to travel from the Big Island of Hawaii to Adelaide for the Tour Down Under and the start of the 2010 cycling season.  Thanks to a blog that I stumbled on over the holidays, it seems like a good time to appreciate the risk management lessons from Lance over the years.  That’s the subject of today’s post.

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