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Giving Flexibility to the Nelson-Siegel Class of Term Structure Models

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  • Rafael Barros de Rezende

    (Stockholm School of Economics - Department of Finance)

Abstract

This paper compares the interpolation abilities of nonparametric and parametric term structure models which are widely used by the main Central Banks of the world. Seeking the combination of smoothness and flexibility, a new Nelson-Siegel class model is introduced. It emerges as an extension of the Svensson (1994) and the five factor model proposed by De Rezende and Ferreira (2008) and Christensen, Diebold and Rudebusch (2008). It is shown the superiority of the smoothing spline model in interpolating the spot and forward rates as well as the advantage of the proposed model over the other Nelson-Siegel models. The superiority of the smoothing spline, however, comes with a cost: its instability in fitting the initial vertices of the term structure. The proposed model, on the other hand, exhibits the desirable properties of smoothness and flexibility, especially for the forward rates and the spot rates of medium and long terms.

Suggested Citation

  • Rafael Barros de Rezende, 2011. "Giving Flexibility to the Nelson-Siegel Class of Term Structure Models," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(1), pages 27-49.
    • Handle: RePEc:brf:journl:v:9:y:2011:i:1:p:27-49
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    References listed on IDEAS

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    Cited by:

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    3. Aryo Sasongko & Cynthia Afriani Utama & Buddi Wibowo & Zaäfri Ananto Husodo, 2019. "Modifying Hybrid Optimisation Algorithms to Construct Spot Term Structure of Interest Rates and Proposing a Standardised Assessment," Computational Economics, Springer;Society for Computational Economics, vol. 54(3), pages 957-1003, October.

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    More about this item

    Keywords

    Spot Curve; Forward Curve; Nelson-Siegel models; smoothing spline;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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