Arbitrage bounds for the term structure of interest rates

This paper proposes a methodology for simultaneously estimating the term structure of interest rates and computing its arbitrage bounds. It uni es existing estimation procedures that apply smoothing and linear programming methods. The methodology adjusts for tax e ects 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 ows.