Seminar by Damir Filipović

Please Note: This seminar will be given online.

Stripping the Discount Curve - a Robust Machine Learning Approach

We introduce a robust, flexible and easy-to-implement method for estimating the yield curve from Treasury securities. This method is non-parametric and optimally learns basis functions in reproducing Hilbert spaces with an economically motivated smoothness reward. We provide a closed-form solution of our machine learning estimator as a simple kernel ridge regression, which is straightforward and fast to implement. We show in an extensive empirical study on U.S. Treasury securities, that our method strongly dominates all parametric and non-parametric benchmarks. Our method achieves substantially smaller out-of-sample yield and pricing errors, while being robust to outliers and data selection choices. We attribute the superior performance to the optimal trade-off between flexibility and smoothness, which positions our method as the new standard for yield curve estimation.

The paper is joint with Markus Pelger and Ye Ye, and available at SSRN: https://ssrn.com/abstract=4058150