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Optimal Mix of the Extended Nelson Siegel Model for Turkish Sovereign Yield Curve

Author

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  • Oguzhan Cepni
  • Doruk Kucuksarac

Abstract

[EN] Yield curve is one of the most fundamental tools used by central banks. The most popular method to estimate yield curve by the central banks is Extended Nelson Siegelmodel. However, there are some technical differences in yield curve estimation. These differences are mainly related to the choice of objective function and the maturity spectrum of bonds in the data set. In this respect, this note aims to find out the optimal combination of the Turkish Treasury bond market yield curve based on the Extended Nelson Siegel model. Main findings indicate that the exclusion of long-term bonds results in a better in-sample fit for the short-term bonds.On the other hand, the inclusion of repo transactions leads to a worsening in in-sample fit across all maturity segments regardless of the choice of the objective function. Regarding the choice of objective function, weighted price minimization provides better in sample-fit of the yield curve for all different maturity segments when the repo transactions are excluded. [TR] Getiri egrisi, merkez bankalari tarafindan kullanilan en temel araclardan birisidir. Merkez bankalarinca getiri egrisi tahmin etmek icin en yaygin kullanilan yontem Genisletilmis Nelson Siegel modelidir. Getiri egrisinin tahmininde bazi teknik unsurlar onem arz etmektedir. Soz konusu unsurlar, amac fonksiyonunun secimi ve tahminde kullanilacak tahvil ve bonolarin vade dagilimi olarak iki ana baslik altinda incelenebilir. Bu baglamda, bu notta Genisletilmis Nelson Siegel modeli kullanilarak, Turkiye Hazine tahvil piyasa getiri egrisi icin en uygun amac fonksiyonu ve vade dagilimi bilesimi incelenmektedir. Temel bulgular, uzun vadeli tahvillerin veri setinden cikarilmasinin kisa vadeli tahvil getirilerinin tahminine olumlu yonde katki sagladigina isaret etmektedir. Bununla beraber repo islemlerinin veri setine dahil edilmesi amac fonksiyonuna bagli olmaksizin tum vadelerde getiri egrisi tahminini kotulestirmektedir. Amac fonksiyonu secimi olarak ise, agirliklandirilmis fiyat farklarinin minimize edilmesi repo islemlerinin eklenmedigi durumda daha iyi sonuc vermektedir.

Suggested Citation

  • Oguzhan Cepni & Doruk Kucuksarac, 2017. "Optimal Mix of the Extended Nelson Siegel Model for Turkish Sovereign Yield Curve," CBT Research Notes in Economics 1702, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:econot:1702
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    References listed on IDEAS

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    1. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
    2. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    3. Vasicek, Oldrich A & Fong, H Gifford, 1982. "Term Structure Modeling Using Exponential Splines," Journal of Finance, American Finance Association, vol. 37(2), pages 339-348, May.
    4. Emma Berenguer & Ricardo Gimeno & Juan M. Nave, 2013. "Term structure estimation, liquidity-induced heteroskedasticity and the price of liquidity risk," Working Papers 1308, Banco de España.
    5. Özge AKINCI & Burcu GÜRCİHAN & Refet GÜRKAYNAK & Özgür ÖZEL, 2007. "Devlet iç borçlanma senetleri için getiri eğrisi tahmini," Iktisat Isletme ve Finans, Bilgesel Yayincilik, vol. 22(252), pages 5-25.
    6. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
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    Cited by:

    1. Karahan, Cenk C. & Soykök, Emre, 2023. "On illiquidity of an emerging sovereign bond market," Economic Systems, Elsevier, vol. 47(2).
    2. Doruk Kucuksarac & Abdullah Kazdal & Ibrahim Ethem Guney, 2018. "Estimation of Currency Swap Yield Curve," CBT Research Notes in Economics 1803, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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