Re: [Quantlib-dev] [QuantLib-svn] SF.net SVN: quantlib:[16065] trunk/QuantLib/ql/termstructures/yield/ forwardcurve.hpp

[Ferdinando A. <qf...@am...>]

On Wed, Mar 25, 2009 at 12:33 PM, Luigi Ballabio
<lui...@gm...> wrote:
> I agreed with the change, but I though it would have been a
> good thing to have its rationale explained

which now prompts me to tackle a possible next step.

While I thought that flat fwd extrapolation was uncontroversial when
modelling fwd rates (InterpolatedForwardCurve), it might become
slightly controversial when applied to discount
(InterpolatedDiscountCurve) and zero (InterpolatedZeroCurve).

In the current situation for InterpolatedDiscountCurve we are
extrapolating discounts, which is not sensible and might lead to
negative and/or increasing discounts
Any flat discount extrapolation would simply make no sense at all as
it would imply null fwd rates.

As for InterpolatedZeroCurve we are now extrapolating zero, which
again is not sensible and might lead to negative rates.
In this case flat zero extrapolation might look tempting, but it is
actually equivalent to extrapolate flat fwd rates equal to their
average value over the interpolation interval: a quite bizzarre
assumption which also introduce a jump in fwd rates.

So I propose to extrapolate flat fwd rates and this could be quite
easily implemented in the InterpolatedXXXCurve classes.

Any opinion?

ciao -- Nando