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Calibrating the Nelson–Siegel–Svensson model

  • Manfred Gilli
  • Stefan Große
  • Enrico Schumann

The Nelson–Siegel–Svensson model is widely-used for modelling the yield curve, yet many authors have reported ‘numerical difficulties’ when calibrating the model. We argue that the problem is twofold: firstly, the optimisation problem is not convex and has multiple local optima. Hence standard methods that are readily available in statistical packages are not appropriate. We implement and test an optimisation heuristic, Differential Evolution, and show that it is capable of reliably solving the model. Secondly, we also stress that in certain ranges of the parameters, the model is badly conditioned, thus estimated parameters are unstable given small perturbations of the data. We discuss to what extent these difficulties affect applications of the model.

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File URL: http://comisef.eu/files/wps031.pdf
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Paper provided by COMISEF in its series Working Papers with number 031.

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Length: 23 pages
Date of creation: 30 Mar 2010
Date of revision:
Handle: RePEc:com:wpaper:031
Contact details of provider: Web page: http://www.comisef.eu

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  1. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
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