Open AccessInterest Rate Term Structure Decomposition at the Instrument Level
Author(s) -
Brian Barnard
Publication year - 2019
Publication title -
applied economics and finance
Language(s) - English
Resource type - Journals
eISSN - 2332-7308
pISSN - 2332-7294
DOI - 10.11114/aef.v6i3.1975
Subject(s) - axiom , term (time) , decomposition , implementation , valuation (finance) , smoothness , portfolio , computer science , econometrics , mathematics , economics , accounting , finance , ecology , mathematical analysis , physics , geometry , quantum mechanics , biology , programming language
The paper examines term structure decomposition at the instrument level – decomposing term structures for issues as well as the portfolio. Three different implementations are stipulated: axiomatic structural approaches, a sequential approach, and a base structure approach. The three different implementations are evaluated against a portfolio of risk-free government bonds. The goodness-of-fit and smoothness properties of instrument-level term structure decomposition are also considered. The conclusion points to remaining gaps in theory regarding instrument-level term structure decomposition, and considers areas of application – typically bond valuation.