Advanced Yield Curve Calibration, Mixed Interpolation Schemes & How to Incorporate Jumps and the Turn-of-Year Effect

Abstract

Yield curves are used to imply the forward rates and discount factors from market tradable instruments and are required to discount future cash flows and evaluate the price of all financial contracts. Not all instruments can be included in the yield curve calibration or fitting process, hence we interpolate any gaps and missing forward rates. In this paper we discuss interpolation best practise and how to incorporate market jumps and turn of year (ToY) effects into yield curve calibration.