Curve Fitting Artifacts

Curve fitting artifacts are unintended features or distortions in a model caused by the mathematical method rather than the underlying data. For example, a spline might produce artificial oscillations between two data points, creating unrealistic forward rates.

These artifacts can lead to incorrect pricing of derivatives or faulty risk sensitivity calculations. Traders must learn to distinguish between genuine market signals and mathematical artifacts produced by their models.

Regularization and careful selection of interpolation methods are used to mitigate these effects. Understanding the limitations of the chosen curve-fitting technique is a prerequisite for any quantitative professional.

Failure to account for these artifacts can lead to significant financial loss in automated trading systems.