The effect of parallel OTC-DVP bond market introduction on yield curve volatility

Grum, Andraž (2006): The effect of parallel OTC-DVP bond market introduction on yield curve volatility. Published in: The Proceedings of Rijeka Faculty of Economics – Journal of Economics and Business , Vol. 24, No. 1 (June 2006): pp. 123-140.

Abstract

The goal of this paper is to analyze the effect of OTC-DVP (over the counter delivery versus payment) fixed income market introduction in Slovenia on the term structure estimation and on the volatility of zero coupon yields and forward interest rates. For the purpose of the analysis Slovenian zero coupon and forward curves were estimated. The model used for yield curve estimation was Nelson-Siegel model as it proved to be superior in terms of goodness of fit, to other statistical methods of yield curve estimation, namely: Svensson model, B-splines model, smoothing B-splines model and Merrill Lynch exponential splines model. Results of analysis show that OTC-DVP bond market introduction (as parallel bond market) has improved the information content of bond prices for term structure estimation purpose. The volatility of spot and forward rates for mid and long remind maturities has fallen with the highest density on the longest maturity segment.

• Item Type: MPRA Paper
• Language: English
• Keywords: OTC-DVP bond market; term structure estimation; splines; Nelson-Siegel model; yield volatility
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C10 - General; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates