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How arbitrage-free is the Nelson-Siegel model?

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  • Coroneo, Laura
  • Nyholm, Ken
  • Vidova-Koleva, Rositsa

Abstract

We test whether the Nelson and Siegel (1987) yield curve model is arbitrage-free. Theoretically, the Nelson-Siegel model does not ensure the absence of arbitrage opportunities, as shown by Bjork and Christensen (1999) and Filipovic (1999). Still, central banks and wealth managers rely heavily on it. Using zero-coupon yield curve data from the US market, we find that the no-arbitrage parameters are not statistically different from those obtained from the Nelson-Siegel model. We therefore conclude that the Nelson-Siegel yield curve model is compatible with the no-arbitrage constraints on the US market. To corroborate this result, we also show that the Nelson-Siegel model performs as well as its no-arbitrage counterpart in an out-of-sample forecasting experiment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 18 (2011)
Issue (Month): 3 (June)
Pages: 393-407

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Handle: RePEc:eee:empfin:v:18:y:2011:i:3:p:393-407

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

Related research

Keywords: Nelson-Siegel model No-arbitrage restrictions Affine term structure model;

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References

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Citations

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Cited by:
  1. Wali Ullah & Yasumasa Matsuda, 2014. "Generalized Nelson-Siegel Term Structure Model : Do the second slope and curvature factors improve the in-sample fit and out-of-sample forecast?," TERG Discussion Papers 312, Graduate School of Economics and Management, Tohoku University.
  2. Wolfgang Karl Härdle,Piotr Majer & Melanie Schienle, 2012. "Yield Curve Modeling and Forecasting using Semiparametric Factor Dynamics," SFB 649 Discussion Papers SFB649DP2012-048, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2008. "An Arbitrage-Free Generalized Nelson-Siegel Term Structure Model," PIER Working Paper Archive 08-030, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Prokopczuk, Marcel & Siewert, Jan B. & Vonhoff, Volker, 2013. "Credit risk in covered bonds," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 102-120.
  5. Leo Krippner, 2012. "A theoretical foundation for the Nelson and Siegel class of yield curve models," CAMA Working Papers 2012-11, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  6. Galvao, Ana Beatriz & Costa, Sonia, 2013. "Does the euro area forward rate provide accurate forecasts of the short rate?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 131-141.
  7. Rafael Barros de Rezende, 2008. "Giving flexibility to the Nelso-Siegel class of term structure models," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807211322560, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  8. Alfaro, Rodrigo & Becerra, Juan Sebastian & Sagner, Andres, 2010. "Estimación de la estructura de tasas utilizando el modelo Dinámico Nelson Siegel: resultados para Chile y EEUU
    [The Dynamic Nelson-Siegel model: empirical results for Chile and US]
    ," MPRA Paper 25912, University Library of Munich, Germany, revised 23 Jun 2010.
  9. Donati, Paola & Donati, Francesco, 2008. "Modelling and Forecasting the Yield Curve under Model uncertainty," Working Paper Series 0917, European Central Bank.
  10. Annaert, Jan & Claes, Anouk G.P. & De Ceuster, Marc J.K. & Zhang, Hairui, 2013. "Estimating the spot rate curve using the Nelson–Siegel model," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 482-496.
  11. Eran Raviv, 2013. "Prediction Bias Correction for Dynamic Term Structure Models," Tinbergen Institute Discussion Papers 13-041/III, Tinbergen Institute.

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