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A rotated Dynamic Nelson-Siegel model with macro-financial applications

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  • Nyholm, Ken

Abstract

A factor rotation scheme is applied to the well-known Dynamic Nelson-Siegel model facilitating direct parametrization of the short rate process. The model-implied term structure of term premia is derived in closed-form, and macroeconomic variables are included in a Taylor-rule- type fashion. Four empirical experiments are performed on US data covering the period from 1990 to 2014. It is found that macroeconomic variables impact the evolution of the short rate until 2002, after which their effects become insignificant in a statistical sense. The calculated term structure of term premia is robust to the tested parameterzations, and traces out the interest rate cycles present in the data. JEL Classification: G1, E4, C5

Suggested Citation

  • Nyholm, Ken, 2015. "A rotated Dynamic Nelson-Siegel model with macro-financial applications," Working Paper Series 1851, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20151851
    Note: 120728
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    1. Ferdinand Dreher & Johannes Gräb & Thomas Kostka, 2020. "From carry trades to curvy trades," The World Economy, Wiley Blackwell, vol. 43(3), pages 758-780, March.

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    More about this item

    Keywords

    dynamic Nelson-Siegel model; factor rotation; policy rate; state space model; term premia; yield curve modeling;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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