Testing term structure estimation methods: evidence from the UK STRIPs market

James M. Steeley

Research output: Contribution to journalArticlepeer-review


Prices and yields of UK government zero-coupon bonds are used to test alternative yield curve estimation models. Zero-coupon bonds permit a more pure comparison, as the models are providing only the interpolation service and also not making estimation feasible. It is found that better yield curves estimates are obtained by fitting to the yield curve directly rather than fitting first to the discount function. A simple procedure to set the smoothness of the fitted curves is developed, and a positive relationship between oversmoothness and the fitting error is identified. A cubic spline function fitted directly to the yield curve provides the best overall balance of fitting error and smoothness, both along the yield curve and within local maturity regions.
Original languageEnglish
Pages (from-to)1489-1512
Number of pages24
JournalJournal of Money, Credit and Banking
Issue number7
Publication statusPublished - Oct 2008


  • term structure
  • gilt
  • spline


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