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A theoretical foundation for the Nelson and Siegel class of yield curve models

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  • Leo Krippner

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Abstract

Yield curve models within the popular Nelson and Siegel (hereafter NS) class are shown to arise from a formal low-order Taylor approximation to the generic Gaussian affine term structure model. That theoretical foundation provides an assurance that NS models correspond to a well-accepted framework for yield curve modeling. It further suggests that any yield curve from the GATSM class should be parsimoniously representable by an two-factor arbitrage-free NS model, which should prove useful for macrofinance applications. Such a model is derived and applied to provide evidence for changes in United States yield curve dynamics pre- and post-1988.

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File URL: http://cama.crawford.anu.edu.au/pdf/working-papers/2012/112012.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2012-11.

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Length: 41 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:een:camaaa:2012-11

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Cited by:
  1. Jens H.E. Christensen, 2013. "A regime-switching model of the yield curve at the zero bound," Working Paper Series, Federal Reserve Bank of San Francisco 2013-34, Federal Reserve Bank of San Francisco.
  2. Leo Krippner, 2012. "Modifying Gaussian term structure models when interest rates are near the zero lower bound (this is a revised version of CAMA working paper 36/2011)," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2012-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Leo Krippner, 2009. "A theoretical foundation for the Nelson and Siegel class of yield curve models," Reserve Bank of New Zealand Discussion Paper Series DP2009/10, Reserve Bank of New Zealand.
  4. Leo Krippner, 2012. "Modifying Gaussian term structure models when interest rates are near the zero lower bound," Reserve Bank of New Zealand Discussion Paper Series DP2012/02, Reserve Bank of New Zealand.
  5. Leo Krippner, 2014. "Measuring the stance of monetary policy in conventional and unconventional environments," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2014-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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