A generalised arbitrage-free Nelson–Siegel model: The impact of unspanned stochastic volatility

Rui Chen and Ke Du

Finance Research Letters, 2013, vol. 10, issue 1, 41-48

Abstract: Although statistical term structure models provide exceptional in-sample fitting and out-of-sample forecasting of interest rates, the lack of theoretical background is criticized by academics and practitioners, such as the absent of arbitrage free. In this paper we develop a general Arbitrage-Free Nelson–Siegel model under the HJM framework. It features unspanned stochastic volatility factors while maintaining a Nelson–Siegel factor loading structure. This paper also exploits the potential to jointly model the interest rates and their derivatives.

Keywords: Term structure; Nelson and Siegel model; Unspanned stochastic volatility (search for similar items in EconPapers)
JEL-codes: C60 G11 G12 G13 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:10:y:2013:i:1:p:41-48

DOI: 10.1016/j.frl.2012.07.001

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