Estimating A Smooth Term Structure of Interest Rates

This paper extends the literature of the term structure estimation with splines. We fit the term struc-ture of interest rates with a smoothing spline method that uses a different smoothing norm and locates the knot points by the size of the fitting errors. The method is applied to the Finnish fixed income market and compared to the usual smoothing spline methods and to the equally spaced knot loca-tions. The results show that the new method where the spline is placed on the log of the discount function and the knots are located freely outperforms the other methods