Zero-Coupon and Forward Yield Curves for Government of Ghana Bonds

Abstract

This article seeks to provide a framework for modeling daily zero-coupon yield curve for Government of Ghana bonds based on secondary market daily trades. It also proposes method for modeling the forward yield curve. The current practice in Ghana is to produce yield curve for Government of Ghana bonds based on primary market weekly auctions. This article demonstrates the extraction and fitting of secondary market daily yield curves for Government of Ghana bonds, using bootstrapping and piecewise cubic hermite interpolation. The article also compares the piecewise cubic hermite method with the piecewise cubic spline method, the Nelson–Siegel–Svensson model, and the penalized smoothing spline method. Data used are the daily bond price data from the Ghana Fixed Income Market, accessible at the Central Securities Depository of Ghana. The results show yield curves that reflect the actual daily yield movements in the secondary bond market of Ghana. The results also show that the piecewise cubic hermite method fits the zero-coupon yield curve better than the other methods as far as the Ghanaian bond market is concerned. For the forward curves, we recommend that either or both of the piecewise cubic hermite method and the Nelson–Siegel–Svensson method could be used by the market participants.