TY - JOUR
TI - Yield Curve Estimation in Illiquid Bond Markets
T2 - HSE Economic Journal
IS - HSE Economic Journal
KW - yield curve
KW - term structure of interest rates
KW - bond market
KW - Nelson – Siegel method
KW - liquidity level
KW - missing data
KW - emerging markets
AB - There are many different models for estimation of a yield curve from bond market quotes. These models are well suited for developed markets with high liquidity level and market data readily available. However, this is not always the case for developing markets that are characterized by infrequent trading, heterogeneous liquidity and frequent missing data.In this article we provide a review of the existing and theoretically possible solutions to the problems arising in the process of yield curve construction in developing markets. Our review shows, that all these problems can be effectively tackled by adapting traditional yield curves models to the observer liquidity level of developing market.Heterogeneous liquidity can be addressed by introducing liquidity-based weights into a yield curve model and by removing observations with atypical liquidity from the dataset. To solve missing data problem, we suggest using dynamic yield curve models or recreating missing observations with help of a supplementary model. In special cases when there are not enough bond issues on the market one is recommended to simplify yield curve model and use the data from other markets (e.g. derivative market).The article might be of a great use for market practitioners who operate on developing bond markets as well as for quants who are engaged in construction of yield curves. It also serves as a starting point for a further academic research in the area of term structure modelling in illiquid bond markets.
AU - Mikhail Makushkin
AU - Victor Lapshin
UR - https://ej.hse.ru/en/2021-25-2/476333599.html
PY - 2021
SP - 177-195
VL - 25