Calibrating the Nelson-Siegel-Svensson Model

Abstract

The Nelson-Siegel-Svensson model is widely-used for modelling the yield curve, yet many authors have reported ‘numerical difficulties’ when calibrating the model. We argue that the problem is twofold: firstly, the optimisation problem is not convex and has multiple local optima. Hence standard methods that are readily available in statistical packages are not appropriate. We implement and test an optimisation heuristic, Differential Evolution, and show that it is capable of reliably solving the model. Secondly, we also stress that in certain ranges of the parameters, the model is badly conditioned, thus estimated parameters are unstable given small perturbations of the data. We discuss to what extent these difficulties affect applications of the model.

Keywords: Interest Rate Models, Term Structure Models, Nelson-Siegel, Nelson-Siegel-Svensson, Differential Evolution, R

JEL Classification: G12, G17, E43, E47, C51, C61, C63