This paper proposes a methodology for simultaneously estimating the term structure of interest rates and computing its arbitrage bounds. It unifies existing estimation procedures that apply smoothing and linear programming methods. The methodology adjusts for tax effects and (possibly asymmetric) transaction costs. The paper reviews and extends the arbitrage theory of bond markets which is based on the duality theory of mathematical programming. Apart from term structure estimation, the theory can be used to optimize bond portfolios, spot arbitrage arbitrage opportunities, and hedge non-traded cash flows. Keywords: term structure of interest rates, yield curve, arbitrage bounds, linear programming, duality theory JEL classification: E43, C14, C61 Acknowledgement The research on this paper was carried out at the Sonderforschungsbereich 373 at Humboldt University Berlin. Financial support by the Deutsche Forschungsgemeinschaft is greatfully acknowledged. I'd like to thank Harald Engli...

The arbitrage pricing principle has been used to derive price relations like the Black-Scholes formula and Heath-Jarrow-Morton models in the context of frictionless markets and unconstrained trading. These relations may or may not be good approximations to reality. Even if, they are certainly not enforced by real world arbitrage because of transaction costs and trading constraints.

This paper proposes linear higher order conditions on the term structure that allow to compute valuation bounds for any deterministic cash stream.

This paper presents an analysis of tax clientele effects in the German government bond market from the viewpoint of private investors. The methods developed here allow the identification of bonds that are over-valued from the viewpoint of a certain tax class, the estimation of tax-specific term structures, and the identification of representative investors. Regression and no-arbitrage approaches are unified. The empirical results presented have important implications for the estimation of the term structure from coupon bond prices and the valuation of interest rate derivatives.

This paper presents an analysis of tax clientele eects in the German government bond market from the viewpoint of private investors. The

Various regression and smoothing techniques have been suggested for estimating the term structure. They focus on what functional form to choose or which measure of smoothness to maximize, mostly neglecting the discussion of the appropriate measure of fit. Arbitrage theory provides insight into how small the pricing error will be and in which sense, depending on the structure of transaction costs. We prove a general result relating the minimal pricing error one incurs in pricing all bonds with one term structure to the maximal arbitrage profit one can achieve with restricted portfolios.

Abstract. This paper investigates tax effects in the Canadian government bond market during the period 1964–1986. Unlike previous studies, we apply both statistical and nonstatistical tests to analyze clientele effects and market equilibria. The results divide the sample into two distinct periods of time, with the end of 1976 marking the division. We find that tax effects are almost nonexistent in the Canadian government bond market before the end of 1976, but are predominant in the post-1976 period. Non-segmented market equilibria cannot be rejected before 1977, but are strongly rejected after 1976. In fact, segmented equilibria with clientele effects in both quantities and prices characterize the entire five year period from 1982 to 1986. These findings are consistent with tax reforms, government deficit financing and interest rate fluctuations in Canada during our sample period. 1.