A generalised arbitrage-free Nelson–Siegel model: The impact of unspanned stochastic volatility
AbstractAlthough statistical term structure models provide exceptional in-sample fitting and out-of-sample forecasting of interest rates, the lack of theoretical background is criticized by academics and practitioners, such as the absent of arbitrage free. In this paper we develop a general Arbitrage-Free Nelson–Siegel model under the HJM framework. It features unspanned stochastic volatility factors while maintaining a Nelson–Siegel factor loading structure. This paper also exploits the potential to jointly model the interest rates and their derivatives.
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Bibliographic InfoArticle provided by Elsevier in its journal Finance Research Letters.
Volume (Year): 10 (2013)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/frl
Term structure; Nelson and Siegel model; Unspanned stochastic volatility;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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