The Affine Arbitrage-Free Class of Nelson-Siegel Term Structure Models

Jens Christensen (), Francis Diebold () and Glenn Rudebusch ()
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Jens Christensen: Financial Research, Federal Reserve Bank of San Francisco

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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 this canonical representation greatly improves its empirical tractability; furthermore, we find that improvements in predictive performance are achieved from the imposition of absence of arbitrage.

Keywords: arbitrage; Nelson-Siegel; term structure; factor models; forecast accuracy (search for similar items in EconPapers)
JEL-codes: C5 G1 E4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-mac
Date: 2007-09-11
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Related works:
Working Paper: The affine arbitrage-free class of Nelson-Siegel term structure models (2007)
Working Paper: The Affine Arbitrage-Free Class of: Nelson-Siegel Term Structure Models (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:pen:papers:07-029

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