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Linearized Nelson–Siegel and Svensson models for the estimation of spot interest rates

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  • Gauthier, Geneviève
  • Simonato, Jean-Guy
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    Abstract

    Linearized versions of the Nelson–Siegel (1987) and Svensson (1994) models for the cross-sectional estimation of spot yield curves from samples of coupon bonds are developed and analyzed. It is shown how these models can be made linear in the level, slope and curvature parameters and how prior information about these parameters can be incorporated in the estimation procedure. The performance of the linearized models are assessed in a Monte Carlo setting and with a sample of US government bonds. The results reveal that the linearized models compare favorably to the original models in terms of parameter estimates stability, computing effort and prevalence of local optima.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0377221712000057
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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 219 (2012)
    Issue (Month): 2 ()
    Pages: 442-451

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    Handle: RePEc:eee:ejores:v:219:y:2012:i:2:p:442-451

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Term structure of interest rates; Spot rate curves; Coupon bonds; Prior information; Linearization;

    References

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    1. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, C.E.P.R. Discussion Papers.
    2. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    3. Lars E. O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates," IMF Working Papers 94/114, International Monetary Fund.
    4. Jens H.E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2007. "The affine arbitrage-free class of Nelson-Siegel term structure models," Working Paper Series 2007-20, Federal Reserve Bank of San Francisco.
    5. Gurkaynak, Refet S. & Sack, Brian & Wright, Jonathan H., 2007. "The U.S. Treasury yield curve: 1961 to the present," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2291-2304, November.
    6. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June.
    7. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
    8. Francis X. Diebold & Canlin Li, 2002. "Forecasting the Term Structure of Government Bond Yields," Center for Financial Institutions Working Papers 02-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
    9. Bolder, David & Streliski, David, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports 84, Bank of Canada.
    10. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
    11. Bank for International Settlements, 2005. "Zero-coupon yield curves: technical documentation," BIS Papers, Bank for International Settlements, number 25, May.
    12. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
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    Cited by:
    1. Hana Hladíková & Jarmila Radová, 2012. "Term Structure Modelling by Using Nelson-Siegel Model," European Financial and Accounting Journal, University of Economics, Prague, vol. 2012(2), pages 36-55.
    2. Mitra, Sovan & Date, Paresh & Mamon, Rogemar & Wang, I-Chieh, 2013. "Pricing and risk management of interest rate swaps," European Journal of Operational Research, Elsevier, vol. 228(1), pages 102-111.

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