Working Paper: NBER ID: w14463
Authors: Jens He Christensen; Francis X Diebold; Glenn D Rudebusch
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.
Keywords: No keywords provided
JEL Codes: G1; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Svensson generalization of the Nelson-Siegel model does not maintain arbitrage-free consistency over time (G19) | suboptimal forecasting performance (C53) |
| introduction of the arbitrage-free generalized Nelson-Siegel model (G19) | enforcement of no-arbitrage conditions while retaining essential characteristics of the original model (G19) |
| arbitrage-free generalized Nelson-Siegel model (G19) | superior empirical forecasting performance compared to predecessors (C53) |
| inclusion of an additional slope factor alongside curvature factors (C29) | better modeling of the yield curve (C50) |
| interactions among the latent factors (C38) | influence on observed bond yields (E43) |