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Unformatted text preview: Nice flexible form to estimate shapes and no spline is needed. 2 parameters has problems capturing certain shapes, hence the development of the 3 parameter model. de!) = er (r)1 Fitting the Curve With splines need to oe careful of under or over fitting, i.. e. where we pick the switch points or knots. All that's left is to find the parameters given the data, So you need some criteria for this. like allnear regressjon, you can minimize squared errors between the actual datil and the implied data point from the function, The spot curve will give you a fitted yield (price] for a bond and you can observe the yield in the market. MinimiZing the root mean squared error between the yield (price) and fitted yield (price) is one WilY to do it: RMSE~ 1 ~(y .)' N f:: ,Y, Exhibit 56 from Fabozzi (6 th edition) 5...
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 Fall '11
 Hood
 Compounding

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