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Fackouch
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Joined: December 10th, 2015, 12:01 pm

difference between interpolation and bootstrapping

February 24th, 2016, 11:34 am

Hello,I just have a general question regarding Interpolation and bootstrapping. They both aim to find missing points in the curve but what is the difference between for example linear interpolation and bootstrapping for calculation missing rates in the Swap curve?Thanks.
 
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daveangel
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Joined: October 20th, 2003, 4:05 pm

difference between interpolation and bootstrapping

February 24th, 2016, 11:48 am

you use interpolation to find the points that you don't have between two points that you do have.you use bootstrapping to add one or more points to your curve
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Cuchulainn
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difference between interpolation and bootstrapping

February 24th, 2016, 12:26 pm

QuoteOriginally posted by: daveangelyou use interpolation to find the points that you don't have between two points that you do have.you use bootstrapping to add one or more points to your curveYou do bootstrapping with incomplete data?
 
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lballabio
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difference between interpolation and bootstrapping

February 24th, 2016, 1:04 pm

When interpolating, you have a set of (say) times t_i, a set of quantities x_i (for instance, discount factors) and you simply interpolate values between them.When bootstrapping, you have the t_i and a set of f(x_0, x_1, ..., x_i) (for instance, swap rates, which depend on a series of discount factors before maturity). You don't want to interpolate the f_i directly; instead, you want to find the underlying x_i and interpolate those. So you start from f_0 and find the corresponding x_0, then you tackle f_1 and find the corresponding x_1 given the x_0 you calculated previously, and so on iteratively until the last x_n.
 
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Fackouch
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Joined: December 10th, 2015, 12:01 pm

difference between interpolation and bootstrapping

February 24th, 2016, 4:35 pm

I'm trying to find a rate between 2 points so I should use then interpolation method. I have 2 years rate and 1 year rate but I'm trying to find 14 months rate.I'm not trying to build a curve so I can leave the bootstrapping out :)Thanks all for the help.
 
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berndL
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Joined: August 22nd, 2007, 3:46 pm

difference between interpolation and bootstrapping

February 28th, 2016, 9:25 am

Hi,you could have a look at this link.bootstrappingThere has also been a more recent article in the wilmott magazine on this. Only i dont remeber it atm. It talks about avoiding <<risk-bleeding>> i think. So the hedge should remain local and should not include instruments with longer maturity then the instrument that is to be hedged. The basic point is formulating what you require from your bootstrapping. If you have no particular requirements you could do the most simple thing. Which is maybe linear interpolation?