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The affine arbitrage-free class of Nelson-Siegel term structure models

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

We derive the class of arbitrage-free affine dynamic term structure models that approximate the widely-used Nelson-Siegel yield-curve specification. Our theoretical analysis relates this new class of models to the canonical representation of the three-factor arbitrage-free affine model. Our empirical analysis shows that imposing the Nelson-Siegel structure on this canonical representation greatly improves its empirical tractability; furthermore, we find that improvements in predictive performance are achieved from the imposition of absence of arbitrage.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-20.

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Date of creation: 2007
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Handle: RePEc:fip:fedfwp:2007-20
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