An Arbitrage-Free Generalized Nelson-Siegel Term Structure Model

Jens Christensen, Francis Diebold and Glenn Rudebusch

No 14463, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed, we show that the factor loadings of the Svensson generalization cannot be obtained in a standard finance arbitrage-free affine term structure representation. Therefore, we introduce a closely related generalized Nelson-Siegel model on which the no-arbitrage condition can be imposed. We estimate this new arbitrage-free generalized Nelson-Siegel model and demonstrate its tractability and good in-sample fit.

JEL-codes: G1 G12 (search for similar items in EconPapers)
Date: 2008-11
New Economics Papers: this item is included in nep-fmk
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Published as Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2009. "An arbitrage-free generalized Nelson--Siegel term structure model," Econometrics Journal, Royal Economic Society, vol. 12(3), pages C33-C64, November.

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Journal Article: An arbitrage-free generalized Nelson--Siegel term structure model (2009)
Working Paper: An arbitrage-free generalized Nelson-Siegel term structure model (2008)
Working Paper: An Arbitrage-Free Generalized Nelson-Siegel Term Structure Model (2008)
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