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Testing the Performance of Cubic Splines and Nelson-Siegel Model for Estimating the Zero-coupon Yield Curve

Lorenčič Eva ()
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Lorenčič Eva: Ranca 35, 2211 Pesnica pri Mariboru, Slovenia

Naše gospodarstvo/Our economy, 2016, vol. 62, issue 2, 42-50

Abstract: Understanding the relationship between interest rates and term to maturity of securities is a prerequisite for developing financial theory and evaluating whether it holds up in the real world; therefore, such an understanding lies at the heart of monetary and financial economics. Accurately fitting the term structure of interest rates is the backbone of a smoothly functioning financial market, which is why the testing of various models for estimating and predicting the term structure of interest rates is an important topic in finance that has received considerable attention for many decades. In this paper, we empirically contrast the performance of cubic splines and the Nelson-Siegel model by estimating the zero-coupon yields of Austrian government bonds. The main conclusion that can be drawn from the results of the calculations is that the Nelson-Siegel model outperforms cubic splines at the short end of the yield curve (up to 2 years), whereas for medium-term maturities (2 to 10 years) the fitting performance of both models is comparable.

Date: 2016
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