ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura.

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Yield Curve Smoothing: Nelson-Siegel versus Spline Technologies: A Preview of Parts 2-4

08/09/2009 08:52 AM

Over the courses of this week, we’ll post parts 2, 3 and 4 of our series on the legacy Nelson-Siegel smoothing approach versus more modern spline technologies, in particular the maximum smoothness forward rate technique published by Adams and van Deventer, with major help from Oldrich Vasicek,  in 1993.

In the course of parts 2, 3 and 4 in the series, we do the following:

  • Implement Nelson-Siegel on Russian bond data
  • Implement Maximum Smoothness forward rate smoothing on the same data from Russia
  • Compare the results and show that the maximum smoothness forward rate technique is much more robust over all possible yield curve shapes.

In short, the Nelson-Siegel approach is the bulldozer of yield curve smoothing techniques.  It is heavily constrained in terms of possible yield curve shapes and can be consistently inconsistent with market bond prices.  The maximum smoothness forward rate technique, by contrast, is the sewing needle of yield curve smoothing. It can be used as finely or as crudely as the data dictates.  Stay tuned for the proof in parts 2, 3 and 4 of this series.

Sean Klein and Donald R. van Deventer
Kamakura Corporation
Honolulu,  August 10, 2009

 

ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura.

Read More

ARCHIVES