Monetary and Economic Studies Vol.30 / November 2012

Comparative Analysis of Zero Coupon Yield Curve Estimation Methods Using JGB Price Data

Kentaro Kikuchi, Kohei Shintani

This paper conducts a comparative analysis of the diverse methods for estimating the Japanese government bond (JGB) zero coupon yield curve (hereafter, zero curve) according to the criteria that estimation methods should meet. Previous studies propose many methods for estimating the zero curve from the market prices of coupon-bearing bonds. In estimating the JGB zero curve, however, an undesirable method may fail to accurately grasp the features of the zero curve. To select an appropriate estimation method for the JGB, we set the following criteria for the zero curve: (1) estimates should not fall below zero; (2) estimates should not take abnormal values; (3) estimates should have a good fit to market prices; and (4) the zero curve should have little unevenness. The method that meets these criteria enables us to estimate the zero curve with a good fit to JGB market prices and a proper interpolation to grasp the features of the zero curve. Based on our analysis, we conclude that the method proposed in Steeley (1991) is the most appropriate in light of the criteria for the JGB price data. In fact, the zero curve based on this method can fully capture the characteristics of the JGB zero curve in a prolonged period of accommodative monetary policy.

Keywords: Coupon-bearing government bond; Zero coupon yield; Piecewise polynomial function


Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2012 Bank of Japan All Rights Reserved.

Home Japanese Home