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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.

Suggested Citation

  • Christensen, Jens H.E. & Diebold, Francis X. & Rudebusch, Glenn D., 2011. "The affine arbitrage-free class of Nelson-Siegel term structure models," Journal of Econometrics, Elsevier, vol. 164(1), pages 4-20, September.
    • Handle: RePEc:eee:econom:v:164:y:2011:i:1:p:4-20
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    Keywords

    Yield curve Interest rate Bond market Factor model Forecasting;

    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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