Machine Learning for Yield Curve Feature Extraction: Application to Illiquid Corporate Bonds (Preliminary Draft)
This work addresses yield curve feature extraction for illiquid corporate bonds, but it appears incremental as it applies an existing method to a new financial domain.
The paper tackles the problem of extracting market-implied features from historical corporate bond yields in illiquid markets by applying a Denoising Autoencoder algorithm, comparing its performance with a Thin Plate Spline interpolation method.
This paper studies the application of machine learning in extracting the market implied features from historical risk neutral corporate bond yields. We consider the example of a hypothetical illiquid fixed income market. After choosing a surrogate liquid market, we apply the Denoising Autoencoder algorithm from the field of computer vision and pattern recognition to learn the features of the missing yield parameters from the historically implied data of the instruments traded in the chosen liquid market. The results of the trained machine learning algorithm are compared with the outputs of a point in- time 2 dimensional interpolation algorithm known as the Thin Plate Spline. Finally, the performances of the two algorithms are compared.