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

This article establishes that most models within the popular and widely used Nelson and Siegel (1987, hereafter NS) class, with one notable exception being the Svensson (1995) variant, are effectively reduced-form representations of the generic Gaussian affine term structure model outlined in Dai and Singleton (2002). That fundamental theoretical foundation provides a compelling case for applying certain NS models as standard tools for yield curve analysis in economics and finance: users get the well-established pragmatic benefits of NS models along with an assurance that they correspond to a well-accepted set of principles and assumptions for modelling the yield curve and its dynamics.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2009/10.

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Length: 17 p
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:nzb:nzbdps:2009/10
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  7. Francis X. Diebold & Canlin Li & Vivian Z. Yue, 2007. "Global Yield Curve Dynamics and Interactions: A Dynamic Nelson-Siegel Approach," PIER Working Paper Archive 07-030, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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