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Calibrating the Nelson–Siegel–Svensson model

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  • Manfred Gilli
  • Stefan Große
  • Enrico Schumann

Abstract

The Nelson–Siegel–Svensson model is widely-used for modelling the yield curve, yet many authors have reported ‘numerical difficulties’ when calibrating the model. We argue that the problem is twofold: firstly, the optimisation problem is not convex and has multiple local optima. Hence standard methods that are readily available in statistical packages are not appropriate. We implement and test an optimisation heuristic, Differential Evolution, and show that it is capable of reliably solving the model. Secondly, we also stress that in certain ranges of the parameters, the model is badly conditioned, thus estimated parameters are unstable given small perturbations of the data. We discuss to what extent these difficulties affect applications of the model.

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File URL: http://comisef.eu/files/wps031.pdf
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Bibliographic Info

Paper provided by COMISEF in its series Working Papers with number 031.

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Length: 23 pages
Date of creation: 30 Mar 2010
Date of revision:
Handle: RePEc:com:wpaper:031

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Web page: http://www.comisef.eu

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References

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  1. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
  2. Lars E. O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates," IMF Working Papers 94/114, International Monetary Fund.
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Cited by:
  1. Eran Raviv, 2013. "Prediction Bias Correction for Dynamic Term Structure Models," Tinbergen Institute Discussion Papers 13-041/III, Tinbergen Institute.
  2. Marianna Lyra, 2010. "Heuristic Strategies in Finance – An Overview," Working Papers 045, COMISEF.
  3. Francisco Rivadeneyra, 2012. "The U.S.-Dollar Supranational Zero-Coupon Curve," Discussion Papers 12-5, Bank of Canada.
  4. Michał Brzoza-Brzezina & Jacek Kotłowski, 2014. "Measuring the natural yield curve," Applied Economics, Taylor & Francis Journals, vol. 46(17), pages 2052-2065, June.
  5. Virmani, Vineet, . "On the Choice of Optimization Routine in Estimation of Parsimonious Term Structure Models: Results from the Svensson Model," IIMA Working Papers WP2013-01-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
  6. Andreas Groll & Brenda López-Cabrera & Thilo Meyer-Brandis, 2014. "A consistent two-factor model for pricing temperature derivatives," SFB 649 Discussion Papers SFB649DP2014-006, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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