A static approach to the Nelson-Siegel-Svensson model: an application for several negative yield cases

Maria Teresa Garcia (mtgarcia@iseg.ulisboa.pt) and Vítor Hugo Ferreira Carvalho

No 2018/35, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: The appearance of negative bond yields presents significant challenges for the fixed income markets, which mainly concern related forecasting models. The Nelson-Siegel-Svensson model (NSS) is one of the models that is most frequently used by central banks to estimate the term structure of interest rates. The objective of this study is to evaluate the application of the NSS model to fit the yield curve of a set of 20 countries, the majority from the Eurozone, which registered negative sovereign bond yields. We conclude that the model adjusted well for all countries’ yield curves, although no changes or constraints were introduced. In addition, a comparison was carried out between market instantaneous interest rate and the interest rate for the very distant future, which the model can predict, with good results for the instantaneous interest rate. An evaluation of the possible behaviour of shared debt securities (i.e. Eurobonds) was also analysed. In conclusion, the NSS model seems to remain a valuable, easy to use, and adaptable tool, to fit negative yield curves, for monetary policy institutions and market players alike.

Keywords: yield curve; negative bond yields; Eurobonds; Nelson-Siegel-Svensson model (search for similar items in EconPapers)
JEL-codes: C02 C18 E43 E47 G12 G17 (search for similar items in EconPapers)
Date: 2018-03
New Economics Papers: this item is included in nep-mac
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