A Simple and General Approach to Fitting the Discount Curve Under No-Arbitrage Constraints

We suggest a simple and general approach to fitting the discount curve under no-arbitrage constraints based on a penalized shape-constrained B-spline. Our approach accommodates B-splines of any order and fitting both under the L-1 and the L-2 loss functions. Simulations and an empirical analysis of US STRIPS data from 2001-2009 suggest that an active knot search and splines of order three and four are mandatory to obtain reasonable fits. The loss function appears to be less relevant