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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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File URL: http://www.nber.org/papers/w13611.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13611.

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Date of creation: Nov 2007
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Publication status: published as Christensen, Jens H.E. & Diebold, Francis X. & Rudebusch, Glenn D., 2011. "The affine arbitrage-free class of Nelson-Siegel term structure models," Journal of Econometrics, Elsevier, vol. 164(1), pages 4-20, September.
Handle: RePEc:nbr:nberwo:13611
Note: AP EFG IFM
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