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Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters

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Author Info

  • Siem Jan Koopman

    ()
    (VU University Amsterdam)

  • Max I.P. Mallee

    ()
    (VU University Amsterdam)

  • Michel van der Wel

    ()
    (VU University Amsterdam)

Abstract

This 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 Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-095/4.

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Date of creation: 07 Dec 2007
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Handle: RePEc:dgr:uvatin:20070095

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

Related research

Keywords: Yield Curve; Time-varying Volatility; Spline Functions; Kalman Filter; Missing Values;

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References

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  1. Michiel De Pooter, 2007. "Examining the Nelson-Siegel Class of Term Structure Models," Tinbergen Institute Discussion Papers, Tinbergen Institute 07-043/4, Tinbergen Institute.
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Cited by:
  1. 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.

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