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The affine arbitrage-free class of Nelson-Siegel term structure models

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  • Christensen, Jens H.E.
  • Diebold, Francis X.
  • Rudebusch, Glenn D.

Abstract

We derive the class of affine arbitrage-free dynamic term structure models that approximate the widely used Nelson-Siegel yield curve specification. These arbitrage-free Nelson-Siegel (AFNS) models can be expressed as slightly restricted versions of the canonical representation of the three-factor affine arbitrage-free model. Imposing the Nelson-Siegel structure on the canonical model greatly facilitates estimation and can improve predictive performance. In the future, AFNS models appear likely to be a useful workhorse representation for term structure research.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 164 (2011)
Issue (Month): 1 (September)
Pages: 4-20

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Handle: RePEc:eee:econom:v:164:y:2011:i:1:p:4-20
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

Keywords: Yield curve Interest rate Bond market Factor model Forecasting;

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Find related papers by JEL classification:
  • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
  • G1 - Financial Economics - - General Financial Markets
  • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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