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Examining the Nelson-Siegel Class of Term Structure Models

Michiel De Pooter

No 07-043/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: In this paper I examine various extensions of the Nelson and Siegel (1987) model with the purpose of fitting and forecasting the term structure of interest rates. As expected, I find that using more flexible models leads to a better in-sample fit of the term structure. However, I show that the out-of-sample predictability improves as well. The four-factor model, which adds a second slope factor to the three-factor Nelson-Siegel model, forecasts particularly well. Especially with a one-step state-space estimation approach the four-factor model produces accurate forecasts and outperforms competitor models across maturities and forecast horizons. Subsample analysis shows that this outperformance is also consistent over time.

Keywords: Term structure of interest rates; Nelson-Siegel; Svensson; Forecasting; State-space model (search for similar items in EconPapers)
JEL-codes: C32 C5 E4 (search for similar items in EconPapers)
Date: 2007-06-11
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20070043

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