Discount curve estimation by monotonizing McCulloch splines
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Date
2006-05-04T09:52:53Z
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Abstract
In this paper a new and very simple method for monotone estimation of discount curves is proposed. The main idea of this approach
is a simple modification of the commonly used (unconstrained) Mc-Culloch Spline. We construct an integrated density estimate from the predicted values of the discount curve. It can be shown that this statistic is an estimate of the inverse of the discount function and the final estimate can easily be obtained by a numerical inversion. The resulting procedure is extremely simple and we have implemented it in Excel and VBA, respectively. The performance is illustrated by
three examples, in which the curve was previously estimated with an unconstrained McCulloch Spline.
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Keywords
Discount curves, Excel, Mc-Culloch spline, Monotone estimation, VBA