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Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters


  • Siem Jan Koopman

    () (VU University Amsterdam)

  • Max I.P. Mallee

    () (VU University Amsterdam)

  • Michel van der Wel

    () (VU University Amsterdam)


This discussion paper has resulted in a publication in the Journal of Business and Economic Statistics , 2010, 28(3), 329-343. In this discussion paper we introduce time-varying parameters in the dynamic Nelson–Siegel yield curve model for the simultaneous analysis and forecasting of interest rates of different maturities. The Nelson–Siegel model has been recently reformulated as a dynamic factor model with vector autoregressive factors. We extend this framework in two directions. First, the factor loadings in the Nelson–Siegel yield model depend on a single loading parameter that we treat as the fourth latent factor. Second, we specify the overall volatility as a generalized autoregressive conditional heteroscedasticity (GARCH) process. We present empirical evidence of considerable increases in within-sample goodness of fit for these advances in the dynamic Nelson–Siegel model.

Suggested Citation

  • Siem Jan Koopman & Max I.P. Mallee & Michel van der Wel, 2007. "Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters," Tinbergen Institute Discussion Papers 07-095/4, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20070095

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    References listed on IDEAS

    1. Diebold, Francis X. & Li, Canlin & Yue, Vivian Z., 2008. "Global yield curve dynamics and interactions: A dynamic Nelson-Siegel approach," Journal of Econometrics, Elsevier, vol. 146(2), pages 351-363, October.
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    More about this item


    Yield Curve; Time-varying Volatility; Spline Functions; Kalman Filter; Missing Values;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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