Estimating the Yield Curve Using the Nelson-Siegel Model: Evidence from Daily Yield Data

Since 2000, Japanese government bond yields have been very low. In this study, I estimate the yield curve using the Nelson-Siegel model with the daily yield data in Japan. This estimation focuses on the changes in the decay factor and examines how the estimates of the level, slope and curvature factors change. Based on the Nelson-Siegel model, I conduct the estimation using two methods―a linear estimation method under which the decay factor remains fixed, and a non-linear estimation method under which the factor is estimated every period. I find that the latter method achieves much a more precise estimation. This finding is prominent particularly under a low-interest-rate environment like the one that was observed in the 2010s. In addition, the estimation shows that the decay factor started decreasing gradually from the day when the BOJ decided to introduce Quantitative and Qualitative Monetary Easing and that the level factor fell steeply immediately after the decision to introduce the negative interest rate policy. Moreover, the volatility of the decay factor decreased after the introduction of yield curve control.