Introduction
Interpolation is a method of estimating a price or yield of a security. It is a statistical method which uses the related values to estimate an unknown price or yield of a security.
Interpolation is a simple mathematical concept. One can reasonably estimate the value of the set of points that have not been calculated if there is a consistent trend across a set of data points. This is just the best estimate of the value. No interpolator can offer complete confidence in their predictions.
Understanding Interpolation
- There are several kinds of interpolation, including linear interpolation, polynomial interpolation, and piecewise constant interpolation.
- The easiest kind is a linear interpolation, where a value of security or interest rate is calculated for a point where there is no data.
- One should not confuse interpolation with extrapolation, where value is estimated outside the known range of data.
- It is a fairly simple method to estimate the values, but it lacks correctness.
