Flat forward interpolation

same · April 13th, 2011, 6:55 am

In relation to CDS curves what is flat forward interpolation and how is it done? Also what are the advantages over other interpolations. I'm having trouble finding and information on this.Thanks

same · April 20th, 2011, 1:28 pm

no one knows - i'm not surprised - i think some people have been making stuff up

bearish · April 20th, 2011, 4:06 pm

Flat forward interpolation of curves, whether in interest rate or CDS space, simply corresponds to piecewise constant forward rates (risk neutral hazard rates for CDS), typically chosen to jump at each maturity date in the dataset you are fitting. They are used (at least occasionally) for two reasons: it's simple to implement, and it provides "local" sensitivities to the input rates. The obvious downside is that they are not exactly economically plausible.