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The Affine Arbitrage-Free Class of Nelson-Siegel Term Structure Models

Author

Listed:
  • Jens H. E. Christensen
  • Francis X. Diebold
  • Glenn D. Rudebusch

Abstract

We derive the class of affine arbitrage-free dynamic term structure models that approximate the widely-used Nelson-Siegel yield curve specification. These arbitrage-free Nelson-Siegel (AFNS) models can be expressed as slightly restricted versions of the canonical representation of the three-factor affine arbitrage-free model. Imposing the Nelson-Siegel structure on the canonical model greatly facilitates estimation and can improve predictive performance. In the future, AFNS models appear likely to be a useful workhorse representation for term structure research.

Suggested Citation

  • Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2010. "The Affine Arbitrage-Free Class of Nelson-Siegel Term Structure Models," Working Paper Series 2007-20, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2007-20
    DOI: 10.24148/wp2007-20
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    JEL classification:

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

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