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amkey04
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Joined: January 5th, 2004, 9:19 am

Forward Curve Construction

April 7th, 2004, 6:25 am

hi.. I am trying to construct the daily 3 month USD forward curve using depo rate up to 3 month, eurodollar up to 2 years and swap up to 30 years. I have some questions on this which I hope someone can help me.a) I am using local interpolation techniques for DF and intermediate swap rates for boostrapping. Unfortunately, my forward curves has many tiny humps espcially between the last eurodollar and the 2 year swap and the long end of the curve. Is there a way to obtain a smooth forward curve? or is't possible to get a smooth forward curve using local interpolation techniques?b) Which parameter has a major influence on the smoothness of the forward curve?c) Can anyone point me to some references on this? I went through the entire wilmott forum but can't seem to find any discussion on forward curve smoothing.Thanks a lot for the helpamkey04
 
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jon
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Joined: July 14th, 2002, 3:00 am

Forward Curve Construction

April 13th, 2004, 5:28 pm

smoothing the fwd curve is common (but still subjective) practiceit eliminates the zig-zag underspecification effect of bootstrapping using swaps (i.e. you have less market instrument prices than there are discount factor curve points) there is a good article in Oct-03 or Nov-03 Wilmott magazine called The Art and Science of Curve Building by Dr Owen WalshRgds.
 
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slevin
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Joined: January 5th, 2003, 5:11 am

Forward Curve Construction

April 14th, 2004, 1:40 am

Actually, local interpolation with certain kinds of splines is an OK method. The trick is to use the spline without a back-propagating second order effect.
 
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amkey04
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Joined: January 5th, 2004, 9:19 am

Forward Curve Construction

April 26th, 2004, 1:09 pm

thanks for the reply Jon and Slevin. Do you think you can PM me the article found on Wilmott magazine?
Last edited by amkey04 on April 25th, 2004, 10:00 pm, edited 1 time in total.
 
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DrEvil
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Joined: April 22nd, 2004, 10:17 pm

Forward Curve Construction

April 26th, 2004, 2:17 pm

You could also use regression/optimization to fit the parameters of a Merton, CIR, LMM, Hull-White, etc. model. That way you actually have an implied short rate volatility and expectation, rather than just an interpolation.
 
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amkey04
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Joined: January 5th, 2004, 9:19 am

Forward Curve Construction

April 26th, 2004, 2:43 pm

Can you elaborate on that DrEvil? you mean interpolation on the swap rate?
 
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Ganzo
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Joined: April 10th, 2003, 1:22 pm

Forward Curve Construction

December 2nd, 2004, 3:14 pm

Hi amkey...can I have the doc on the curves...txs
 
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AlanB
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Joined: July 14th, 2002, 3:00 am

Forward Curve Construction

December 2nd, 2004, 6:00 pm

QuoteOriginally posted by: amkey04hi.. I am trying to construct the daily 3 month USD forward curve using depo rate up to 3 month, eurodollar up to 2 years and swap up to 30 years. I have some questions on this which I hope someone can help me.a) I am using local interpolation techniques for DF and intermediate swap rates for boostrapping. Unfortunately, my forward curves has many tiny humps espcially between the last eurodollar and the 2 year swap and the long end of the curve. Is there a way to obtain a smooth forward curve? or is't possible to get a smooth forward curve using local interpolation techniques?b) Which parameter has a major influence on the smoothness of the forward curve?c) Can anyone point me to some references on this? I went through the entire wilmott forum but can't seem to find any discussion on forward curve smoothing.Thanks a lot for the helpamkey04"Semi-Empirical Smooth Fit To The Treasury Yield Curve", Paul Diament, The Journal of Fixed Income, June 1993, pp. 55-70
Last edited by AlanB on December 1st, 2004, 11:00 pm, edited 1 time in total.
 
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jambodev
Posts: 80
Joined: September 6th, 2008, 11:07 am

Forward Curve Construction

January 28th, 2010, 12:09 am

QuoteOriginally posted by: jonsmoothing the fwd curve is common (but still subjective) practiceit eliminates the zig-zag underspecification effect of bootstrapping using swaps (i.e. you have less market instrument prices than there are discount factor curve points) there is a good article in Oct-03 or Nov-03 Wilmott magazine called The Art and Science of Curve Building by Dr Owen WalshRgds.I do appreciate it if someone can possibly send me this article.Regards
 
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Structurer
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Joined: May 31st, 2006, 7:04 pm

Forward Curve Construction

January 28th, 2010, 9:53 pm

Fincad article
 
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jambodev
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Joined: September 6th, 2008, 11:07 am

Forward Curve Construction

January 29th, 2010, 8:53 am

Thanks Structurer, This is useful.And is this also applicable to commodity forward curves?
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