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

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Author Info
Leo Krippner (Reserve Bank of New Zealand)
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.

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

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Length: 17 p
Date of creation: Sep 2009
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Handle: RePEc:nzb:nzbdps:2009/10

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February. [Downloadable!] (restricted)
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    Other versions:
  5. 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, vol. 60(1), pages 77-105, January. [Downloadable!] (restricted)
  6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
  7. 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 06-017, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  8. Diebold, Francis X. & Li, Canlin & Yue, Vivian Z., 2008. "Global yield curve dynamics and interactions: A dynamic Nelson-Siegel approach," Journal of Econometrics, Elsevier, vol. 146(2), pages 351-363, October. [Downloadable!] (restricted)
    Other versions:
  9. Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2008. "An arbitrage-free generalized Nelson-Siegel term structure model," Working Paper Series 2008-07, Federal Reserve Bank of San Francisco. [Downloadable!]
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  10. 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, vol. 131(1-2), pages 309-338. [Downloadable!] (restricted)
    Other versions:
  11. Bent Jesper Christensen & Tomas Björk, . "Interest Rate Dynamics and Consistent Forward Rate Curves," Management Working Papers 1999-4, School of Economics and Management, University of Aarhus. [Downloadable!]
    Other versions:
  12. Michael J. Fleming, 2003. "Measuring treasury market liquidity," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-108. [Downloadable!]
    Other versions:
  13. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, vol. 63(3), pages 415-441, March. [Downloadable!] (restricted)
  14. Leo Krippner, 2006. "A Theoretically Consistent Version of the Nelson and Siegel Class of Yield Curve Models," Applied Mathematical Finance, Taylor and Francis Journals, vol. 13(1), pages 39-59, March. [Downloadable!] (restricted)
  15. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October. [Downloadable!] (restricted)
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    Other versions:
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