Examining the Nelson-Siegel Class of Term Structure Models
AbstractIn this paper I examine various extensions of the Nelson and Siegel (1987) model with the purpose of fitting and forecasting the term structure of interest rates. As expected, I find that using more flexible models leads to a better in-sample fit of the term structure. However, I show that the out-of-sample predictability improves as well. The four-factor model, which adds a second slope factor to the three-factor Nelson-Siegel model, forecasts particularly well. Especially with a one-step state-space estimation approach the four-factor model produces accurate forecasts and outperforms competitor models across maturities and forecast horizons. Subsample analysis shows that this outperformance is also consistent over time.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-043/4.
Date of creation: 11 Jun 2007
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Term structure of interest rates; Nelson-Siegel; Svensson; Forecasting; State-space model;
Find related papers by JEL classification:
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-23 (All new papers)
- NEP-FMK-2007-06-23 (Financial Markets)
- NEP-FOR-2007-06-23 (Forecasting)
- NEP-MAC-2007-06-23 (Macroeconomics)
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