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A Comparative Analysis of Parsimonious Yield Curve Models with Focus on the Nelson-Siegel, Svensson and Bliss Versions

Ranik Raaen Wahlstrøm (), Florentina Paraschiv and Michael Schürle
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Ranik Raaen Wahlstrøm: Norwegian University of Science and Technology
Florentina Paraschiv: Norwegian University of Science and Technology
Michael Schürle: University of St. Gallen

Computational Economics, 2022, vol. 59, issue 3, No 3, 967-1004

Abstract: Abstract We shed light on computational challenges when fitting the Nelson-Siegel, Bliss and Svensson parsimonious yield curve models to observed US Treasury securities with maturities up to 30 years. As model parameters have a specific financial meaning, the stability of their estimated values over time becomes relevant when their dynamic behavior is interpreted in risk-return models. Our study is the first in the literature that compares the stability of estimated model parameters among different parsimonious models and for different approaches for predefining initial parameter values. We find that the Nelson-Siegel parameter estimates are more stable and conserve their intrinsic economical interpretation. Results reveal in addition the patterns of confounding effects in the Svensson model. To obtain the most stable and intuitive parameter estimates over time, we recommend the use of the Nelson-Siegel model by taking initial parameter values derived from the observed yields. The implications of excluding Treasury bills, constraining parameters and reducing clusters across time to maturity are also investigated.

Keywords: Parsimonious yield curve models; Term structure; Monetary policy decisions; Non-linear least squares; Initial values; E430; G120 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10614-021-10113-w

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