How to Deform a Yield Curve: The Most Likely Deformation of a Yield Curve Consistent with Subjective Views

Abstract

In this article, the authors show how the most likely deformation can be assigned to a yield curve, consistent with subjective views on a handful of key rates. They provide an intuitive explanation for the solution, which is perhaps not what one might at first blush have expected. They draw analogies from physics that illuminate the reasoning.

TOPICS: Fixed income and structured finance, quantitative methods