Bayesian Semiparametric Dynamic Nelson-Siegel Model

Cem Çakmaklı

Working Paper series from Rimini Centre for Economic Analysis

Abstract: This paper proposes the Bayesian semiparametric dynamic Nelson-Siegel model, where the density of the yield curve factors and thereby the density of the yields are estimated along with other model parameters. This is accomplished by modeling the error distributions of the factors according to a Dirichlet process mixture. An efficient and computationally tractable algorithm is implemented to obtain Bayesian inference. The semiparametric structure of the factors enables us to capture various forms of non-normalities including fat tails, skewness and nonlinear dependence between factors using a unified approach. The potential of the proposed framework is examined using US bond yields data. The results show that the model can identify two different periods with distinct characteristics. While the relatively stable years of late 1980s and 1990s comprise the first period, the second period captures the years of severe recessions including the recessions of 1970s and 1980s and the recent recession of 2007-9 together with highly volatile periods of Federal Reserve’s monetary policy experiments in the first half of 1980s. Interestingly, results point out a nonlinear dependence structure between the factors contrasting existing evidence.

Keywords: Dynamic factor model; Yield curve; Nelson-Siegel model; Dirichlet process mixture; Bayesian inference (search for similar items in EconPapers)
JEL-codes: C14 C33 C38 G12 (search for similar items in EconPapers)
Date: 2012-08, Revised 2012-09
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.rcea.org/RePEc/pdf/wp59_12.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:59_12

Access Statistics for this paper

More papers in Working Paper series from Rimini Centre for Economic Analysis Contact information at EDIRC.
Bibliographic data for series maintained by Marco Savioli ().