Just wondering if anyone has come across and working papers which address building the term structure of the rate curve based on liquid points.... e.g. in the usd swap market only the 2,5,7,10,12,15,20, and 30 year maturities are liquid and observable, so a methodology for determining the intermediate points (6,8,9y etc) is needed. i know there is a lot of PCA research around but i am looking for something that is not that mathematically intensive..... fyi i am not talking about yield curve interpolation (linear, cubic, etc)....

what exactly are you interested in doing? are you trying to express the delta risk of your swaps book in terms of the tradeable points on the curve?

Hi,I don't know if this is what johnself11 would like to do, but this is EXACTLY what I would like to do. At the moment I just have reprojected all my risk buckets on the surrounding tradeable ones using coeffcients given by linear regression, but I am actually looking for something better,Thanks in advance for your help

QuoteOriginally posted by: johnself11Just wondering if anyone has come across and working papers which address building the term structure of the rate curve based on liquid points.... e.g. in the usd swap market only the 2,5,7,10,12,15,20, and 30 year maturities are liquid and observable, so a methodology for determining the intermediate points (6,8,9y etc) is needed. i know there is a lot of PCA research around but i am looking for something that is not that mathematically intensive..... fyi i am not talking about yield curve interpolation (linear, cubic, etc)....Look at Part 6 of the book "Quantitative Finance and Risk Management - A Physicist's Approach" by Jan Dash. It describes work that I initiated and that subsequently, he and I did on modeling the dynamics of a multifactor yield curve model.

The Macro-Micro Yield-Curve ModelAlanB is talking about the “Macro-Micro” yield-curve model introduced by us in the late 80’s. We believe that this model is a real advance. The model has two goals. The first goal is to model the real-world behavior of the yield curve as a function of time, without introducing unphysical shapes. This has been accomplished (cf. page 703 of my book – see if you can tell which graph is the data and which graph is the model). The second goal is to provide a framework, within this context, to price contingent claims. There is a physically-motivated interpretation of the Macro and Micro components.There is now an improved theoretical framework, including no-arbitrage considerations and hedging properties, and the theoretical incorporation of term-structure constraints. The Macro-Micro model also appears to be relevant to the equity and FX markets. As AlanB said, the model is covered in detail in Ch. 47 – 52. If someone asks, I can post some more information on the model from the book.---------

Interest Rate Modelling by Simona Svoboda ISBN:1403934703 Palgrave Macmillan © 2004 (288 pages) Growth in the derivatives market has brought an ever-increasing volume and range of interest rate dependent products. This book looks at the predecessors of market models, and describes and explains the general shape of the interest rate term structures.Table of Contents Interest Rate Modelling Introduction Part I - Interest Rate Models Chapter 1 - The Vasicek Model Chapter 2 - The Cox, Ingersoll and Ross Model Chapter 3 - The Brennan and Schwartz Model Chapter 4 - Longstaff and Schwartz—A Two-Factor Equilibrium Model Chapter 5 - Langetieg's Multi-Factor Equilibrium Framework Chapter 6 - The Ball and Torous Model Chapter 7 - The Hull and White Model Chapter 8 - The Black, Derman and Toy One-Factor Interest Rate Model Chapter 9 - The Black and Karasinski Model Chapter 10 - The Ho and Lee Model Chapter 11 - The Heath, Jarrow and Morton Model Chapter 12 - Brace, Gatarek and Musiela Model Part II - Calibration Chapter 13 - Calibrating the Hull—White extended Vasicek approach Chapter 14 - Calibrating the Black, Derman and Toy discrete time model Chapter 15 - Calibration of the Heath, Jarrow and Morton framework