How arbitrage-free is the Nelson-Siegel Model?

Laura Coroneo, Ken Nyholm and Rositsa Vidova-Koleva

No 874, Working Paper Series from European Central Bank

Abstract: We test whether the Nelson and Siegel (1987) yield curve model is arbitrage-free in a statistical sense. Theoretically, the Nelson-Siegel model does not ensure the absence of arbitrage opportunities, as shown by Bjork and Christensen (1999). Still, central banks and public wealth managers rely heavily on it. Using a non-parametric resampling technique and zero-coupon yield curve data from the US market, we find that the no-arbitrage parameters are not statistically different from those obtained from the NS model, at a 95 percent confidence level. We therefore conclude that the Nelson and Siegel yield curve model is compatible with arbitrage-freeness. To corroborate this result, we show that the Nelson-Siegel model performs as well as its no-arbitrage counterpart in an out-of-sample fore-casting experiment. JEL Classification: C14, C15, G12

Keywords: Affine term structure models; Nelson-Siegel model; No-arbitrage restrictions; non-parametric test (search for similar items in EconPapers)
Date: 2008-02
Note: 120728
References: Add references at CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp874.pdf (application/pdf)

Related works:
Journal Article: How arbitrage-free is the Nelson-Siegel model? (2011)
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:ecb:ecbwps:2008874

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().