Use of Calibration Methods in Estimating Yield Fixed Income Financial Instruments

Abstract

Given that the temporal structure of interest rates is a highly debated and studied topic in the complex and vast field of scientific research in the financial field, this paper focuses on demonstrating how the evolution of the yield curve of government bonds in a given state can highlight a relationship of dependence or show a degree of influence over the trend observed at the level of another state. The estimation of the various parameters involved in the calculation and construction of this curve, by using the optimization models in this direction, Nelson-Siegel (NS) and Nelson-Siegel-Svensson (NSS), highlights the necessary specific information on the degree of curvature, or turning points, based on the theoretical-applicative basis of the parametric function between the time to maturity of the instrument and its yield. Therefore, finally, the degree of understanding of the mechanism given by the temporal structure is explained by the use of a series of correlational relations, which show various interdependencies between daily yields, estimated parameters or between spreads. The results of the research demonstrate the various dependencies at the level of European countries (Germany, Switzerland, Czech Republic, Norway, Poland, Hungary), as well as outside the European family (Malaysia and Vietnam). It is noteworthy that Germany and the Czech Republic have a high degree of correlation over most of the countries analyzed. As the result, the relevance of fixed income instruments and the theoretical intensification of the temporal structure of interest rates are given by the quantitative procedures of the models used. To conclude, the character of predictability and confidence is capitalized, being quantified in the implementation, adoption and drawing of directions of action of monetary or tax policies, being essential in guiding players in the financial arena on decision-making and investment processes that can contribute to the popularity of risk-free instruments.

Keywords

• yield curve
• parametric models
• Nelson-Siegel
• Nelson-Siegel-Svensson
• correlational relations
• predictability

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