Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters
AbstractThis discussion paper has resulted in a publication in the A rated journal 'Journal of Business and Economic Statistics'. In this discussion paper we introduce time-varying parameters in the dynamic Nelson–Siegel yield curve model for the simultaneous analysis and forecasting of interest rates of different maturities. The Nelson–Siegel model has been recently reformulated as a dynamic factor model with vector autoregressive factors. We extend this framework in two directions. First, the factor loadings in the Nelson–Siegel yield model depend on a single loading parameter that we treat as the fourth latent factor. Second, we specify the overall volatility as a generalized autoregressive conditional heteroscedasticity (GARCH) process. We present empirical evidence of considerable increases in within-sample goodness of fit for these advances in the dynamic Nelson–Siegel model.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-095/4.
Date of creation: 07 Dec 2007
Date of revision:
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Web page: http://www.tinbergen.nl
Yield Curve; Time-varying Volatility; Spline Functions; Kalman Filter; Missing Values;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-23 (All new papers)
- NEP-ECM-2008-02-23 (Econometrics)
- NEP-MAC-2008-02-23 (Macroeconomics)
- NEP-MON-2008-02-23 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michiel De Pooter, 2007. "Examining the Nelson-Siegel Class of Term Structure Models," Tinbergen Institute Discussion Papers, Tinbergen Institute 07-043/4, Tinbergen Institute.
- Drew Creal & Siem Jan Koopman & Andr� Lucas, 2008.
"A General Framework for Observation Driven Time-Varying Parameter Models,"
Tinbergen Institute Discussion Papers, Tinbergen Institute
08-108/4, Tinbergen Institute.
- Drew Creal & Siem Jan Koopman & Andre Lucas, 2009. "A General Framework for Observation Driven Time-Varying Parameter Models," Global COE Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University gd08-038, Institute of Economic Research, Hitotsubashi University.
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