Interpolation of discount factors
This paper deals with the problem of interpolation of discount factors between time buckets. The problem occurs when price and interest rate data of a market segment are assigned to discrete time buckets. A simple criterion is developed in order to identify arbitrage-free robust interpolation methods. Methods closely examined include linear, exponential and weighted exponential interpolation. Weighted exponential interpolation, a method still preferred by some banks and also offered by commercial software vendors, creates several problems and therefore makes simple exponential interpolation a more logical choice. Linear interpolation provides a good approximation of exponential interpolation for a sufficiently dense time grid.
Year of publication: |
1996
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Authors: | Cremers, Heinz ; Schwarz, Willi |
Institutions: | Frankfurt School of Finance and Management |
Saved in:
freely available
Extent: | application/pdf |
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Series: | Frankfurt School - Working Paper Series. - ISSN 1436-9753. |
Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Number 2 |
Source: |
Persistent link: https://www.econbiz.de/10005027025
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