South African Journal of Economic and Management Sciences, Vol 16, No 4 (2013)

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A new method for interpolating yield curve data, with applications to the South African market

Paul Du Preez, Eben Mare

Abstract


This paper presents a method for interpolating yield curve data in a manner that ensures positive and continuous forward curves. As shown by Hagan and West (2006), traditional interpolation methods suffer from problems: they posit unreasonable expectations, or are not necessarily arbitrage-free. The method presented in this paper, which we refer to as the “monotone preserving r(t)t  method", stems from the work done in the field of shape preserving cubic Hermite interpolation, by authors such as Akima (1970), de Boor and Swartz (1977), and Fritsch and Carlson (1980). In particular, the monotone preserving r(t)t method applies shape preserving cubic Hermite interpolation to the log capitalisation function. We present some examples of South African swap and bond curves obtained under the monotone preserving  r(t)t method.

 


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EISSN 2222-3436 (Online)