Estimating yield curves by Kernel smoothing methods

We introduce a new method for the estimation of discount functions, yield curves and forward curves from government issued coupon bonds. Our approach is non-parametric and does not assume particular functional form for the discount function although we do show how to impose various restrictions in the estimation. Our method is based on Kernel smoothing and is defined as the minimum of some localized population moment condition. The solution to the sample problem is not explicit and our estimation procedure is iterative, rather like the backfitting method of estimating non-parametric models. We establish the asymptotic normality of our methods using the asymptotic representation of our estimator as an infinite series with declining coefficients. The rate of convergence is standard for one-dimensional nonparametric conversion.