Knowledge of the term structure of interest rates is undeniably important. It enables the price of a stream of cash flows to be determined and is a key element for pricing certain types of derivative instruments including swaps and forward contracts. It is useful in the formation of economic...

The ideas presented in this paper are those of the authors and not necessarily reflect the views of the National bank of Canada. Both authors thank the National Bank of Canada and the SSHRC of Canada for their help. Thanks are also due to Professor Y. Tian for his comments, and for...

It is often assumed that financial markets are frictionless. Bond markets are illiquid and bond prices are observed with errors. The magnitude of these errors leads to violation of no--arbitrage conditions and, consequently, prevents researchers from obtaining an estimate of the term structure...