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Arbitrage-free relative Nelson–Siegel model

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  • Ishii, Hokuto

Abstract

This paper introduces a model of the difference between home and foreign country interest rates based on the arbitrage-free pricing theory, called the “Arbitrage-free relative Nelson–Siegel model” (AFRNS). This model implies that the relative volatility effect of the model appreciates future exchange rate changes. The effect increases as the future period lengthens.

Suggested Citation

  • Ishii, Hokuto, 2020. "Arbitrage-free relative Nelson–Siegel model," Finance Research Letters, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:finlet:v:37:y:2020:i:c:s1544612319304507
    DOI: 10.1016/j.frl.2019.101377
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    References listed on IDEAS

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    1. Christensen, Jens H.E. & Diebold, Francis X. & Rudebusch, Glenn D., 2011. "The affine arbitrage-free class of Nelson-Siegel term structure models," Journal of Econometrics, Elsevier, vol. 164(1), pages 4-20, September.
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    4. Yu-chin Chen & Kwok Ping Tsang, 2013. "What Does the Yield Curve Tell Us about Exchange Rate Predictability?," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 185-205, March.
    5. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    6. Engel, Charles & West, Kenneth D., 2006. "Taylor Rules and the Deutschmark: Dollar Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1175-1194, August.
    7. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
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    More about this item

    Keywords

    Arbitrage-free pricing theory; Relative yield curve; Uncovered interest rate parity;
    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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