The discrete-time arbitrage-free Nelson-Siegel model: a closed-form solution and applications to mixed funds representation

Ramin Eghbalzadeh, Frédéric Godin and Patrice Gaillardetz

Annals of Actuarial Science, 2024, vol. 18, issue 2, 310-341

Abstract: A closed-form solution for zero-coupon bonds is obtained for a version of the discrete-time arbitrage-free Nelson-Siegel model. An estimation procedure relying on a Kalman filter is provided. The model is shown to produce adequate fit when applied to historical Canadian spot rate data and to improve distributional predictive performance over benchmarks. An adaptation of the mixed fund return model from Augustyniak et al. ((2021). ASTIN Bulletin: The Journal of the IAA, 51(1), 131–159.) is also provided to include the discrete-time arbitrage-free Nelson-Siegel model as one of its building blocks.

Date: 2024
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