Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters

Siem Jan Koopman, Max I.P. Mallee () and Michel van der Wel ()
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Max I.P. Mallee: VU University Amsterdam

No 07-095/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper has resulted in a publication in the Journal of Business and Economic Statistics , 2010, 28(3), 329-343.

In this discussion paper we introduce time-varying parameters in the dynamic Nelson–Siegel yield curve model for the simultaneous analysis and forecasting of interest rates of different maturities. The Nelson–Siegel model has been recently reformulated as a dynamic factor model with vector autoregressive factors. We extend this framework in two directions. First, the factor loadings in the Nelson–Siegel yield model depend on a single loading parameter that we treat as the fourth latent factor. Second, we specify the overall volatility as a generalized autoregressive conditional heteroscedasticity (GARCH) process. We present empirical evidence of considerable increases in within-sample goodness of fit for these advances in the dynamic Nelson–Siegel model.

Keywords: Yield Curve; Time-varying Volatility; Spline Functions; Kalman Filter; Missing Values (search for similar items in EconPapers)
JEL-codes: C32 C51 E43 (search for similar items in EconPapers)
Date: 2007-12-07
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20070095

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