Anderson-Sleath model

The Anderson-Sleath model, which is the method adopted by the Bank of England, is a modification of the Waggoner approach in a number of significant ways. The A(t) function of Waggoner was adapted thus ... 

Oscillation is a natural effect of the cubic spline methodology, and its existence does not impair its effectiveness under many conditions. If observed rates produce very humped curves, the fitted zero-curve using cubic spline does not produce usable results. For policy-making purposes, for example, as used in central banks, and also for certain market valuation purposes, users require forward rates with minimal oscillation. In such cases, however, the Waggoner or Anderson—Sleath models will overcome this problem. We therefore recommend the cubic spline approach under most market conditions. 

The Bank of England uses a variation of the Svensson yield curve model, a one-dimensional paranetric yield curve model. This is similar to the Nelson and Siegel model and defines the forward rate curve/(/n) as a function of a set of unknown parameters, which are related to the short-term interest rate and the slope of the yield curve. The model is summarised in Appendix B. Anderson and Sleath (1999) assess parametric models, including the Svensson model, against spline-based methods such as those described by Waggoner (1997), and we summarise their results later in this chapter. 

In the Svensson model, there are six coefficients Pq, fii, 2. 3. 1 and T2 that must be estimated. The model was adopted by central monetary authorities such as the Swedish Riksbank and the Bank of England (who subsequently adopted a modified version of this model, which we describe shortly, following the publication of the Waggoner paper by the Federal Reserve Bank of England). In their 1999 paper, Anderson and Sleath evaluate the two parametric techniques we have described, in an effort to improve their flexibUity, based on the spline methods presented by Fisher et al. (1995) and Waggoner (1997). 

Anderson and Sleath presented a model in the Bank of England Quarterly Bulletin in November 1999. The main objective of this work was to evaluate the relative efficacy of parametric versus spline-based methods. In fact, different applications call for different methods the main advantage of spline methods is that individual functions in between knot points may move in fairly independent fashion, which makes the resulting curve more flexible than that possible using parametric techniques. In Section 5.5.1 we reproduce their results with permission, which shows that a shock introduced at one end of the curve produces xmsatisfactory results in the parametric curve. 

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