Open AccessAn arbitrage‐free generalized Nelson–Siegel term structure model
Author(s) -
Christensen Jens H. E.,
Diebold Francis X.,
Rudebusch Glenn D.
Publication year - 2009
Publication title -
the econometrics journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.861
H-Index - 36
eISSN - 1368-423X
pISSN - 1368-4221
DOI - 10.1111/j.1368-423x.2008.00267.x
Subject(s) - generalization , arbitrage , term (time) , consistency (knowledge bases) , affine transformation , affine term structure model , representation (politics) , mathematics , mathematical economics , econometrics , economics , yield curve , financial economics , pure mathematics , discrete mathematics , mathematical analysis , politics , political science , law , physics , quantum mechanics
Summary 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 AFGNS model and demonstrate its tractability and good in‐sample fit.