Term structure estimation with missing data: Application for emerging markets

Abstract

This paper addresses the challenge of estimating the term structure of interest rates with missing data. There is a void in the term structure literature when it comes to estimation techniques addressing the challenge of sparse bond price data. Our aim is twofold: (1) to establish an estimation technique that can deal with the missing data problem, and (2) to apply this technique to estimate the term structure of interest rates in Hungary. Hungary offers a unique test of the state-space methodology because it is a relatively developed and stable economy while the bond market is not mature. We show that state-space form of the Nelson–Siegel yield curve can provide efficient estimation in the presence of missing data.