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Nelson and Siegel, no-arbitrage and risk premium

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  • Le Grand François

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    (Paris Jourdan Sciences Economiques (PSE))

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    Abstract

    In this paper, I propose a term structure model which bridges the gap between affine no-arbitrage model and Nelson and Siegel one. My model outperforms significantly in fitting the yield curve, in rejecting the expectation hypothesis and in out-of-sample forecasting. The second point helps to understand the market expectations and is particularly important for portfolio management (of assets or debt securities), whereas the last one is of major interest in monetary policy. In a simple mean-variance framework, one-month returns with my model are more than 70 basis point greater than with standard Nelson and Siegel. Moreover, no-arbitrage constraints do not affect the usual advantages of Nelson and Siegel. My model is indeed as tractable and as parsimonious as the standard Nelson and Siegel one

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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 270.

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    Date of creation: 04 Jul 2006
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    Handle: RePEc:sce:scecfa:270

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