An Arbitrage-Free Generalized Nelson-Siege Term Structure Model

30 Pages Posted: 25 Aug 2008

See all articles by Jens Henrik Eggert Christensen

Jens Henrik Eggert Christensen

FRB of San Francisco - Financial Research

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

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

Christensen, Jens Henrik Eggert and Diebold, Francis X. and Rudebusch, Glenn D., An Arbitrage-Free Generalized Nelson-Siege Term Structure Model (May 27, 2008). PIER Working Paper No. 08-030, Available at SSRN: https://ssrn.com/abstract=1247712 or http://dx.doi.org/10.2139/ssrn.1247712

Jens Henrik Eggert Christensen

FRB of San Francisco - Financial Research ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3115 (Phone)

Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1507 (Phone)
215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
167
Abstract Views
1,111
Rank
322,429
PlumX Metrics