Nelson Siegel Parameterisation of the South African Sovereign Yield Curve: A Link to the Rand Exchange Rate and Jse Sectors

T. Petousis and G.D.I. Barr

Studies in Economics and Econometrics, 2016, vol. 40, issue 1, 41-70

Abstract: This paper applies the Nelson Siegel (NS) parameterisation framework adopted by Diebold and Li (2006) to model the 10-year South African Government yield curve over the period February 2005 to October 2014, producing R-squared values exceeding 80% in 77% of the 117 months falling within the sample period. It goes on to consider the addition of a further “Svensson curvature parameter” over and above the NS Level, Slope, and Curvature factors but concludes that the inclusion of an additional parameter is not statistically justified. These NS parameter estimates, along with a residual rand exchange rate factor, are then used to estimate models of the key Johannesburg Stock exchange indices in return form. The paper is able to show that particular sectors are consistently related to particular NS parameter estimates over the period of analysis and, for example, is able to conclude that share return weakness in the case of “Rand Play” sectors such as Financials, Listed Property and Retail (which occur during periods of rand weakness) takes place only when the bond market is simultaneously selling off. The analysis points to a model of broader- based risk-off market sentiment towards South African assets (currency, equities, and bonds) rather than the often-applied onedimensional, standalone currency effect.

Date: 2016
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DOI: 10.1080/10800379.2016.12097291

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