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A theoretical foundation for the Nelson and Siegel class of yield curve models

  • Leo Krippner

    ()

Yield curve models within the popular Nelson and Siegel (hereafter NS) class are shown to arise from a formal low-order Taylor approximation to the generic Gaussian affine term structure model. That theoretical foundation provides an assurance that NS models correspond to a well-accepted framework for yield curve modeling. It further suggests that any yield curve from the GATSM class should be parsimoniously representable by an two-factor arbitrage-free NS model, which should prove useful for macrofinance applications. Such a model is derived and applied to provide evidence for changes in United States yield curve dynamics pre- and post-1988.

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File URL: http://cama.crawford.anu.edu.au/pdf/working-papers/2012/112012.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2012-11.

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Length: 41 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:een:camaaa:2012-11
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