An Arbitrage-Free Generalized Nelson-Siege Term Structure Model
30 Pages Posted: 25 Aug 2008
Date Written: May 27, 2008
Abstract
The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed, we show that the factor loadings of the Svensson generalization cannot be obtained in a standard finance arbitrage-free affine term structure representation. Therefore, we introduce a closely related generalized Nelson-Siegel model on which the no-arbitrage condition can be imposed. We estimate this new arbitrage-free generalized Nelson-Siegel model and demonstrate its tractability and good in-sample fit.
Keywords: Yield Curve, Interest Rate, Bond Market, Svensson Model
JEL Classification: C5,G1
Suggested Citation: Suggested Citation
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