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

Author

Listed:
  • Oguzhan Cepni

    (Central Bank of the Republic of Turkey)

  • Doruk Kucuksarac

    (Central Bank of the Republic of Turkey)

Abstract

The yield curve is one of the most fundamental tools used by central banks. One of the most popular methods to estimate yield curve by the central banks is Extended Nelson Siegel model. 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.

Suggested Citation

  • Oguzhan Cepni & Doruk Kucuksarac, 2017. "Optimal Mix of the Extended Nelson Siegel Model for Turkish Sovereign Yield Curve," Economics Bulletin, AccessEcon, vol. 37(2), pages 1133-1142.
    • Handle: RePEc:ebl:ecbull:eb-17-00107
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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.
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    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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    More about this item

    Keywords

    Yield curve; Extended Nelson Siegel; Optimization.;
    All these keywords.

    JEL classification:

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

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