Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

Author Info

Abstract

This article establishes that most models within the popular and widely used Nelson and Siegel (1987, hereafter NS) class, with one notable exception being the Svensson (1995) variant, are effectively reduced-form representations of the generic Gaussian affine term structure model outlined in Dai and Singleton (2002). That fundamental theoretical foundation provides a compelling case for applying certain NS models as standard tools for yield curve analysis in economics and finance: users get the well-established pragmatic benefits of NS models along with an assurance that they correspond to a well-accepted set of principles and assumptions for modelling the yield curve and its dynamics.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2009/dp09_10.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2009/10.

as in new window
Length: 17 p
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:nzb:nzbdps:2009/10

Contact details of provider:
Postal: P.O. Box 2498, Wellington
Phone: 64 4 471-3767
Fax: 64 4 471-2270
Email:
Web page: http://www.rbnz.govt.nz
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2014. "Do Central Bank Liquidity Facilities Affect Interbank Lending Rates?," Journal of Business & Economic Statistics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 32(1), pages 136-151, January.
  2. 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, Royal Economic Society, vol. 12(3), pages C33-C64, November.
  3. Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2007. "The Affine Arbitrage-Free Class of Nelson-Siegel Term Structure Models," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 07-029, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Tomas Björk & Bent Jesper Christensen, 1999. "Interest Rate Dynamics and Consistent Forward Rate Curves," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 9(4), pages 323-348.
  5. Diebold, Francis X. & Li, Canlin & Yue, Vivian Z., 2007. "Global yield curve dynamics and interactions: A dynamic Nelson-Siegel approach," CFS Working Paper Series, Center for Financial Studies (CFS) 2008/27, Center for Financial Studies (CFS).
  6. Francis X. Diebold & Canlin Li, 2002. "Forecasting the Term Structure of Government Bond Yields," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 02-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. Berardi, Andrea, 2009. "Term Structure, Inflation, and Real Activity," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 44(04), pages 987-1011, August.
  8. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 60(4), pages 473-89, October.
  9. Francis X. Diebold & Lei Ji & Canlin Li, 2006. "A Three-Factor Yield Curve Model: Non-Affine Structure, Systematic Risk Sources, and Generalized Duration," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 06-017, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  10. Leo Krippner, 2012. "A theoretical foundation for the Nelson and Siegel class of yield curve models," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2012-11, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  11. Peter Hoerdahl & Oreste Tristani, 2004. "A joint econometric model of macroeconomic and term structure dynamics," Econometric Society 2004 North American Summer Meetings, Econometric Society 379, Econometric Society.
  12. Gurkaynak, Refet S & Sack, Brian & Swanson, Eric T, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," MPRA Paper 820, University Library of Munich, Germany.
  13. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  14. Michael J. Fleming, 2003. "Measuring treasury market liquidity," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Sep, pages 83-108.
  15. Yu-chin Chen & Kwok Ping Tsang, 2010. "What Does the Yield Curve Tell Us about Exchange Rate Predictability?," Working Papers, Hong Kong Institute for Monetary Research 292010, Hong Kong Institute for Monetary Research.
  16. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
  17. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 425-436, March.
  18. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2009. "Inflation expectations and risk premiums in an arbitrage-free model of nominal and real bond yields," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jan.
  19. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, Elsevier, vol. 131(1-2), pages 309-338.
  20. Leo Krippner, 2006. "A Yield Curve Perspective on Uncovered Interest Parity," Working Papers in Economics, University of Waikato, Department of Economics 06/16, University of Waikato, Department of Economics.
  21. 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, Reserve Bank of New Zealand DP2012/02, Reserve Bank of New Zealand.
  22. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, American Finance Association, vol. 55(5), pages 1943-1978, October.
  23. Coroneo, Laura & Nyholm, Ken & Vidova-Koleva, Rositsa, 2008. "How arbitrage-free is the Nelson-Siegel Model?," Working Paper Series, European Central Bank 0874, European Central Bank.
  24. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 6(4), pages 379-406.
  25. Dahlquist, Magnus & Svensson, Lars E O, 1996. " Estimating the Term Structure of Interest Rates for Monetary Policy Analysis," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 98(2), pages 163-83, June.
  26. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 177-188, November.
  27. Roberto M. Billi, 2009. "Was monetary policy optimal during past deflation scares?," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q III, pages 67-98.
  28. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, American Finance Association, vol. 56(1), pages 247-277, 02.
  29. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 63(3), pages 415-441, March.
  30. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
  31. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 405-443, 02.
  32. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, Econometric Society, vol. 60(1), pages 77-105, January.
  33. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 363-84, March.
  34. Scott Joslin & Kenneth J. Singleton & Haoxiang Zhu, 2011. "A New Perspective on Gaussian Dynamic Term Structure Models," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 24(3), pages 926-970.
  35. Leo Krippner, 2006. "A Theoretically Consistent Version of the Nelson and Siegel Class of Yield Curve Models," Applied Mathematical Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(1), pages 39-59.
  36. Munk, Claus, 2011. "Fixed Income Modelling," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199575084, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. 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.
  2. 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.
  3. Leo Krippner, 2011. "Modifying Gaussian term structure models when interest rates are near the zero lower bound," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2011-36, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Leo Krippner, 2012. "A theoretical foundation for the Nelson and Siegel class of yield curve models," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2012-11, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. 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.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nzb:nzbdps:2009/10. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reserve Bank of New Zealand Knowledge Centre).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.