Stripping coupons with linear programming


Allen, David, Zheng, E., Thomas, Harry and Lyn, C. (2000) Stripping coupons with linear programming. Journal of Fixed Income, 10, (2), 80-87.

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Description/Abstract

When using market prices to fit the parameters of models for the price of bonds, the first step is to strip the market bonds of their coupons. The standard bootstrapping technique of stripping coupons can cause mispricing if there are no bonds that mature for some periods or if there are several bonds that mature at the same time. In this article we suggest a new linear programming formulation to strip out riskfree and risky zero coupon bond prices, which works whatever the current date, coupon dates, and sampling dates. The stripped U.S. Treasury bond prices match the observed U.S. STRIPS prices. We also discuss issues of liquidity, sampling periods, and implied default probabilities of corporate bonds

Item Type: Article
ISSNs: 1059-8596 (print)
Related URLs:
Subjects: H Social Sciences > HG Finance
H Social Sciences > HF Commerce > HF5601 Accounting
Divisions: University Structure - Pre August 2011 > School of Management
University Structure - Pre August 2011 > School of Mathematics > Operational Research
ePrint ID: 35664
Date Deposited: 03 Aug 2006
Last Modified: 27 Mar 2014 18:22
URI: http://eprints.soton.ac.uk/id/eprint/35664

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