Stripping coupons with linear programming
Stripping coupons with linear programming
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
80-87
Allen, David
a3ce3068-328b-4bce-889f-965b0b9d2362
Zheng, E.
3232009e-c3c2-48c3-b650-0d473b821d72
Thomas, Harry
dc04c4b7-350e-4fe6-9820-c10023597c84
Lyn, C.
88e54193-6bce-4926-80c0-dc6b9386c700
2000
Allen, David
a3ce3068-328b-4bce-889f-965b0b9d2362
Zheng, E.
3232009e-c3c2-48c3-b650-0d473b821d72
Thomas, Harry
dc04c4b7-350e-4fe6-9820-c10023597c84
Lyn, C.
88e54193-6bce-4926-80c0-dc6b9386c700
Allen, David, Zheng, E., Thomas, Harry and Lyn, C.
(2000)
Stripping coupons with linear programming.
The Journal of Fixed Income, 10 (2), .
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
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Published date: 2000
Organisations:
Operational Research
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Local EPrints ID: 35664
URI: http://eprints.soton.ac.uk/id/eprint/35664
ISSN: 1059-8596
PURE UUID: becfc21c-92c0-4cde-9530-442519bda8b7
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Date deposited: 03 Aug 2006
Last modified: 11 Dec 2021 15:29
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Contributors
Author:
David Allen
Author:
E. Zheng
Author:
Harry Thomas
Author:
C. Lyn
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