Working Paper: NBER ID: w13611
Authors: Jens H. E. Christensen; Francis X. Diebold; Glenn D. Rudebusch
Abstract: We derive the class of arbitrage-free affine dynamic term structure models that approximate the widely-used Nelson-Siegel yield-curve specification. Our theoretical analysis relates this new class of models to the canonical representation of the three-factor arbitrage-free affine model. Our empirical analysis shows that imposing the Nelson-Siegel structure on this canonical representation greatly improves its empirical tractability; furthermore, we find that improvements in predictive performance are achieved from the imposition of absence of arbitrage.
Keywords: Term Structure Models; Yield Curve; Nelson-Siegel; Arbitrage-Free Models
JEL Codes: G12; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Imposition of the Nelson-Siegel structure (G19) | Enhanced empirical tractability (C51) |
| Imposition of the Nelson-Siegel structure (G19) | Improved forecasting performance (C53) |
| Absence of arbitrage (G19) | Better predictive outcomes (C52) |
| Absence of arbitrage (G19) | Improved forecasting performance for longer maturities (G17) |
| New class of arbitrage-free models (C58) | Outperform standard dynamic Nelson-Siegel models (G19) |