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Examining the Nelson-Siegel Class of Term Structure Models

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  • Michiel De Pooter

    ()
    (Erasmus Universiteit Rotterdam)

Abstract

In 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 Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-043/4.

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Date of creation: 11 Jun 2007
Date of revision:
Handle: RePEc:dgr:uvatin:20070043

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Web page: http://www.tinbergen.nl

Related research

Keywords: Term structure of interest rates; Nelson-Siegel; Svensson; Forecasting; State-space model;

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Cited by:
  1. Daniel Vela, 2013. "Forecasting Latin-American yield curves: An artificial neural network approach," BORRADORES DE ECONOMIA 010502, BANCO DE LA REPÚBLICA.
  2. Gabriela Galati & Steven Poelhekke & Chen Zhou, 2011. "Did the Crisis Affect Inflation Expectations?," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 167-207, March.
  3. Cem Çakmakli, 2012. "Bayesian Semiparametric Dynamic Nelson-Siegel Model," Working Paper Series 59_12, The Rimini Centre for Economic Analysis, revised Sep 2012.
  4. Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2009. "An arbitrage-free generalized Nelson--Siegel term structure model," Econometrics Journal, Royal Economic Society, vol. 12(3), pages C33-C64, November.
  5. Robert Ferstl & Josef Hayden, . "Zero-Coupon Yield Curve Estimation with the Package termstrc," Journal of Statistical Software, American Statistical Association, vol. 36(i01).
  6. Siem Jan Koopman & Max I.P. Mallee & Michel van der Wel, 2007. "Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters," Tinbergen Institute Discussion Papers 07-095/4, Tinbergen Institute.
  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. Francisco Rivadeneyra, 2012. "The U.S.-Dollar Supranational Zero-Coupon Curve," Discussion Papers 12-5, Bank of Canada.
  9. Koopman, Siem Jan & van der Wel, Michel, 2013. "Forecasting the US term structure of interest rates using a macroeconomic smooth dynamic factor model," International Journal of Forecasting, Elsevier, vol. 29(4), pages 676-694.
  10. International Monetary Fund, 2010. "On the Estimation of Term Structure Models and An Application to the United States," IMF Working Papers 10/258, International Monetary Fund.
  11. Dick van Dijk & Siem Jan Koopman & Michel van der Wel & Jonathan H. Wright, 2012. "Forecasting Interest Rates with Shifting Endpoints," Tinbergen Institute Discussion Papers 12-076/4, Tinbergen Institute.
  12. Wali Ullah & Yasumasa Matsuda, 2012. "Term Structure Modeling and Forecasting of Government Bond Yields : Does Macroeconomic Factors Imply Better Out-of-Sample Forecasts?," TERG Discussion Papers 304, Graduate School of Economics and Management, Tohoku University.
  13. Caio Almeida & Axel Simonsen & José Vicente, 2012. "Forecasting Bond Yields with Segmented Term Structure Models," Working Papers Series 288, Central Bank of Brazil, Research Department.
  14. Daniel Vela, 2013. "Forecasting Latin-American yield curves: An artificial neural network approach," Borradores de Economia 761, Banco de la Republica de Colombia.
  15. Eder, Armin & Keiler, Sebastian & Pichl, Hannes, 2013. "Interest rate risk and the Swiss solvency test," Discussion Papers 41/2013, Deutsche Bundesbank, Research Centre.
  16. 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.

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