A major advantage of the cubic spline approach is that it can be estimated using ordinary least squares (OLS) regression. Which of the following is NOT related to this estimation feature?
A) OLS may be used because the price of bonds is the just the product of cashflows and discount functions summed up over all cash flows.
B) OLS enables the use of all the bonds in the data set, even though there are more bonds than parameters to be estimated.
C) OLS works for polynomials of any order in the splining function.
D) OLS may be used because it satisfies the smoothness condition required for the forward curve in the estimation.

Question

Quizplus · Accepted Answer

The smoothness condition required for the forward curve in the estimation is a characteristic of the cubic spline method itself, not a direct result of using OLS. OLS is a technique for estimating the parameters of a linear regression model, and while it is versatile, the smoothness condition in cubic spline interpolation is ensured by the mathematical properties of the spline, not by the estimation method (OLS) used.

A Major Advantage of the Cubic Spline Approach Is That