A Simplified Linear Projection Approach

Abstract

Certain approaches can be applied to estimate real yields on a daily basis for Thailand’s bond market. The estimation is complicated, data-intensive and time-consuming; hence it is not very useful to practitioners. This study proposes a simple and practical approach which practitioners can actually use. Simplicity and practicality result from the use of readily available, lagged nominal yields for projection variables and from the choice of less computationally-intensive, qualified but less efficient diagonal matrix for minimum chi-square estimation. Using daily nominal yield data of up to 15-year maturity from July 30, 2013 to August 8, 2014 - 250 observations as are commonly chosen by practitioners - together with scaled average headline inflation, the study finds a normal shape for the average daily real curve. The estimation is successful and fast.

Keywords: Daily Real Yields, Affine Mutifactor Interest Rate Model, Daily Real-Yield Estimation, Minimum-Chi-Square Estimation