Optimal Empirical Strategy for Deriving the Spot Curve: The Case of Poland
Optimal Empirical Strategy for Deriving the Spot Curve: The Case of Poland

Summary/Abstract: We use a proprietary dataset of daily quotations of individual bonds from the period 2005–2018 to assess theappropriateness of three common yield curve intrapolation methods: Nelson-Siegel (NS), Diebold-Li (DL) and cubicsplines. Spot (zero-coupon) yield curves derived from the methods are used to price all securities in the samplein both in-sample and out-of-sample settings. The results highlight trade-offs inherent in any empirical strategy:between flexibility and in-sample fit, between overall fit and fit in particular segments of the curve. We look atboth in-sample and out-of-sample. Cubic splines offer the best in-sample fit, but out-of-sample results indicatethat NS and DL curves might be a better choice for researchers interested in medium- and longer-dated securities.We also assess the usefulness of short-term interbank offered rates as proxy for the shortest part of the yieldcurve, finding no appreciable empirical benefit and lack of theoretical justification.

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