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The deterministic shift extension and the affine dynamic Nelson–Siegel model

Author

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  • Dang-Nguyen, Stéphane
  • Le Caillec, Jean-Marc
  • Hillion, Alain

Abstract

The affine dynamic Nelson–Siegel model links the affine class of models with the Nelson–Siegel interpolation scheme of the yield curve. Its parameters are interpreted as the latent factors of the spot rate process driven by an affine diffusion. Using an appropriate specification of this diffusion, the yields become in form of the Nelson–Siegel model but an adjustment term is introduced. In this paper, the model is extended using a deterministic shift extension so as to perfectly fit the term structure and reduce the correction term. This enhancement allows to simulate the yield curve and the spot rate process consistently with the market data used for the calibration of the model. A numerical example discusses the calibration results of the original model and the proposed extension.

Suggested Citation

  • Dang-Nguyen, Stéphane & Le Caillec, Jean-Marc & Hillion, Alain, 2014. "The deterministic shift extension and the affine dynamic Nelson–Siegel model," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 402-417.
    • Handle: RePEc:eee:ecofin:v:29:y:2014:i:c:p:402-417
    DOI: 10.1016/j.najef.2014.06.008
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