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Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters

Author

Listed:
  • Siem Jan Koopman

    (VU University Amsterdam)

  • Max I.P. Mallee

    (VU University Amsterdam)

  • Michel van der Wel

    (VU University Amsterdam)

Abstract

This discussion paper has resulted in a publication in the Journal of Business and Economic Statistics , 2010, 28(3), 329-343. In this discussion paper we introduce time-varying parameters in the dynamic Nelson–Siegel yield curve model for the simultaneous analysis and forecasting of interest rates of different maturities. The Nelson–Siegel model has been recently reformulated as a dynamic factor model with vector autoregressive factors. We extend this framework in two directions. First, the factor loadings in the Nelson–Siegel yield model depend on a single loading parameter that we treat as the fourth latent factor. Second, we specify the overall volatility as a generalized autoregressive conditional heteroscedasticity (GARCH) process. We present empirical evidence of considerable increases in within-sample goodness of fit for these advances in the dynamic Nelson–Siegel model.

Suggested Citation

  • Siem Jan Koopman & Max I.P. Mallee & Michel van der Wel, 2007. "Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters," Tinbergen Institute Discussion Papers 07-095/4, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20070095
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    References listed on IDEAS

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    Cited by:

    1. Borus Jungbacker & Siem Jan Koopman & Michel Wel, 2014. "Smooth Dynamic Factor Analysis With Application To The Us Term Structure Of Interest Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(1), pages 65-90, January.
    2. Wali Ullah & Yasumasa Matsuda & Yoshihiko Tsukuda, 2014. "Dynamics of the term structure of interest rates and monetary policy: is monetary policy effective during zero interest rate policy?," Journal of Applied Statistics, Taylor & Francis Journals, vol. 41(3), pages 546-572, March.
    3. Bianchi, Francesco & Mumtaz, Haroon & Surico, Paolo, 2009. "The great moderation of the term structure of UK interest rates," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 856-871, September.
    4. Wali Ullah & Yasumasa Matsuda & Yoshihiko Tsukuda, 2015. "Generalized Nelson-Siegel term structure model: do the second slope and curvature factors improve the in-sample fit and out-of-sample forecasts?," Journal of Applied Statistics, Taylor & Francis Journals, vol. 42(4), pages 876-904, April.

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    More about this item

    Keywords

    Yield Curve; Time-varying Volatility; Spline Functions; Kalman Filter; Missing Values;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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