BFS 2002

Poster Presentation

Estimating and interpreting zero coupon and forward rates: Australia, 1992 - 2001

Petko Kalev, Brett Inder

This paper presents the results of estimating the zero coupon yield curve from default free Australian treasury instruments based on weekly observations of a recent time period: January 1992 $-$ January 2001. Pure discount bonds and implied forward rates, although not observable for the entire yield curve, are extremely useful for pricing, modelling and analyzing financial securities, hence, the need to extract the theoretical yield curve from noisy prices observed in the market place. Two popular models for curve fitting, together with two specifications are adopted for estimating zero coupon and forward yield rates. The six parameter Svensson's model outperforms the more parsimonious Nelson-Siegel four parameter functional form. During the considered time period a structural break is detected in the zero coupon time series.