The paper presents methods used at the National Bank of Poland for yield curve estimation. A comparative analysis of parsimonious and polynomial models is conducted and the models evaluated according to several criteria. The results indicate that B-spline models stabilized with a variable roughness penalty (VRP) have best overall performance. A new approach to implementing the roughness penalty is proposed. Instead of the commonly used continuous stabilizer a modification of the difference penalty used by Eilers and Marx (1996) is applied. A modified discrete stabilizer is compatible with the continuous penalty function while facilitating analytical solutions and reducing time of computation. Finally, yield curve estimates for Poland are presented and their dynamics analyzed. A simple time-series based test is applied to evaluate the influence of unexpected events on the bond market.

Keywords: yield curve estimation, B-splines, curve smoothing, market dynamics.

  Marek Marciniak, Yield Curve Estimation at the National Bank of Poland Spline Based Methods, Curve Smoothing and Market Dynamics - plik pdf; (767 KB)