Abstract
Even if there are a lot of liquid instruments related to different indexes traded in the market, they constitute only a very small number with respect to the degrees of freedom when constructing a curve. For periods longer than two years there is often at best one yearly instrument and 250 unknowns — one for each business day of the year. The description of a curve needs to supplement those constraints in one way or another to obtain the full yield curve. This is this technique of ‘filling the gaps’ that we call here interpolation. The term interpolation has to be understood in a generic sense; it can be interpolation in a usual sense, like linear interpolation on given node values, or using a general parameterised function with the parameters not related at all to specific nodes.
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© 2014 Marc Henrard
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Henrard, M. (2014). Interpolation. In: Interest Rate Modelling in the Multi-curve Framework. Applied Quantitative Finance. Palgrave Macmillan, London. https://doi.org/10.1057/9781137374660_4
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DOI: https://doi.org/10.1057/9781137374660_4
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