An Arbitrage-Free Generalized Nelson-Siegel Term Structure Model

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

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

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 (search for similar items in EconPapers)
JEL-codes: C5 G1 (search for similar items in EconPapers)
Date: 2008-05-27
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Working Paper: An arbitrage-free generalized Nelson-Siegel term structure model (2008)
Working Paper: An Arbitrage-Free Generalized Nelson-Siegel Term Structure Model (2008)
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