Survey_BX_2006

Abstract

The basic data used to estimate the pricing kernel volatilities consist of estimated zero coupon Treasury bond yields on the second day of each month from January 1985 to May 2002 for the United States, United Kingdom, Germany, Canada, and Japan. The sample period and the number of countries are limited by the availability of government bond data for a sufficient period. Data on bond prices, coupon rates, and coupon, issue, and redemption dates for all available government bonds outstanding on the given date were taken from Datastream. Most bonds in the United States, United Kingdom, Canada, and Japan pay semi-annual coupons: those that did not were eliminated from the sample. In Germany, most bonds pay annual coupons and those that did not were also excluded. Finally, all stripped zero-coupon and floating-rate bonds and bonds that were callable or extended to dates beyond the original redemption dates were excluded. For each country, a cubic spline was fitted each month to the yields on all of the sample bonds with maturities up to twenty years.7 No extrapolation was used in the estimation, so that the longest possible extracted zerocoupon bond yield for a given month is always less than or equal to the longest maturity bond available for that month. For the United States, the United Kingdom, and Canada, zero-coupon bond yields for maturities of six months, 1, 2, 3, 5, 7, and 10 years were obtained for each month, whereas for Germany and Japan, the maximum maturity of the zero-coupon bond yields was only, respectively seven years and eight years for each month. The cubic spline approach has been used previously by McCulloch (1975) to fit the U.S. term structure and by Litzenberger and Rolfo (1984) (LR) to study tax effects on yield curves in different countries.