The Yield Curve Under Nelson-Siegel
Nelson and Siegel (1987) propose a parametric model for the yield curve. Since it is easy to estimate, it became popular among practitioners and Central Bank’s analysts. Diebold and Li (2006) provide a dynamic version of the Nelson-Siegel (DNS) model, showing that it performs well in outof- sample forecasting exercises. However, the model was originally proposed as a curve-fitting tool as opposed to being obtained from a theoretical non-arbitrage framework. Christensen et al. (2009) show that the DNS model is arbitrage-free, giving it theoretical support. In this paper we consider a discrete version of the DNS model, and following the notation developed in Campbell et al. (1997), we show that it belongs to the class of affine-yield model. This provides an alternative proof of the one presented in Christensen et al. (2009), since we use the Euler Equation to show that the yield on a bond is linear in three factors. As in Balduzzi et al. (1998), one of these factors is unobserved, whereas the observed ones can be associated with the long term interest rate and the term spread, respectively. Finally, we discuss the implications of the DNS model for forward rate and the neutral interest rate.
|Date of creation:||Oct 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- J.Marcelo Ochoa, 2006.
"An interpretation of an affine term structure model of Chile,"
Estudios de Economia,
University of Chile, Department of Economics, vol. 33(2 Year 20), pages 155-184, December.
- Juan Marcelo, Ochoa, 2006. "An Interpretation of An Affine Term Structure Model for Chile," MPRA Paper 1072, University Library of Munich, Germany.
- Marco Morales, 2010. "The real yield curve and macroeconomic factors in the Chilean economy," Applied Economics, Taylor & Francis Journals, vol. 42(27), pages 3533-3545.
When requesting a correction, please mention this item's handle: RePEc:chb:bcchwp:531. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda)
If references are entirely missing, you can add them using this form.