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Term Structure Modelling by Using Nelson-Siegel Model

Author

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  • Hana Hladíková
  • Jarmila Radová

Abstract

Zero coupon rates are not observable in the market for a range of maturities. Therefore, an estimation methodology is required to derive the zero coupon yield curves from observable data. If we deal with approximations of empirical data to create yield curves it is necessary to choose suitable mathematical functions. We use parametric model of Nelson and Siegel. The current mathematical apparatus employed for this kind of approximation is outlined. This theoretical background is applied to an estimation of the zero-coupon yield curve derived from the Czech coupon bond market. There are many methodologies and each can provide surprisingly different results. Nevertheless, each seeks to provide an estimation that fit the data well while maintaining an easily interpretable form. On an initial test data sample we have not faced any problems, reported elsewhere, of not having found the global optimum or having found multiple local minima.

Suggested Citation

  • Hana Hladíková & Jarmila Radová, 2012. "Term Structure Modelling by Using Nelson-Siegel Model," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2012(2), pages 36-55.
    • Handle: RePEc:prg:jnlefa:v:2012:y:2012:i:2:id:9:p:36-55
    DOI: 10.18267/j.efaj.9
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    References listed on IDEAS

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    1. Michal Slavík, 2001. "Interest Rates Time Structure and Domestic Bond Prices," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 51(10), pages 591-607, October.
    2. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    3. Gauthier, Geneviève & Simonato, Jean-Guy, 2012. "Linearized Nelson–Siegel and Svensson models for the estimation of spot interest rates," European Journal of Operational Research, Elsevier, vol. 219(2), pages 442-451.
    4. David Bolder & Scott Gusba, 2002. "Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada," Staff Working Papers 02-29, Bank of Canada.
    5. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, C.E.P.R. Discussion Papers.
    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:

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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General

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