Arbitrage-Free Dynamic Nelson-Siegel Yield Curve Modeling
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Abstract
| We derive the class of arbitrage-free affine dynamic term structure models that approximate the widely-used Nelson-Siegel yield-curve specification. Our theoretical analysis relates this new class of models to the canonical representation of the three-factor arbitrage-free affine model. Our empirical analysis shows that imposing the Nelson-Siegel structure on the canonical representation of affine models greatly improves its empirical tractability; furthermore, we find that improvements in predictive performance are achieved from the imposition of absence of arbitrage. |
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| The Seminars in Econometrics Series is supported by the Tinbergen Institute, ERIM and the Journal of Applied Econometrics. |
| Contact information: |
| Erik Kole |
