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A Comparative Analysis of Parsimonious Yield Curve Models with Focus on the Nelson-Siegel, Svensson and Bliss Versions

Author

Listed:
  • Ranik Raaen Wahlstrøm

    (Norwegian University of Science and Technology)

  • Florentina Paraschiv

    (Norwegian University of Science and Technology
    University of St. Gallen)

  • Michael Schürle

    (University of St. Gallen)

Abstract

We shed light on computational challenges when fitting the Nelson-Siegel, Bliss and Svensson parsimonious yield curve models to observed US Treasury securities with maturities up to 30 years. As model parameters have a specific financial meaning, the stability of their estimated values over time becomes relevant when their dynamic behavior is interpreted in risk-return models. Our study is the first in the literature that compares the stability of estimated model parameters among different parsimonious models and for different approaches for predefining initial parameter values. We find that the Nelson-Siegel parameter estimates are more stable and conserve their intrinsic economical interpretation. Results reveal in addition the patterns of confounding effects in the Svensson model. To obtain the most stable and intuitive parameter estimates over time, we recommend the use of the Nelson-Siegel model by taking initial parameter values derived from the observed yields. The implications of excluding Treasury bills, constraining parameters and reducing clusters across time to maturity are also investigated.

Suggested Citation

  • Ranik Raaen Wahlstrøm & Florentina Paraschiv & Michael Schürle, 2022. "A Comparative Analysis of Parsimonious Yield Curve Models with Focus on the Nelson-Siegel, Svensson and Bliss Versions," Computational Economics, Springer;Society for Computational Economics, vol. 59(3), pages 967-1004, March.
    • Handle: RePEc:kap:compec:v:59:y:2022:i:3:d:10.1007_s10614-021-10113-w
    DOI: 10.1007/s10614-021-10113-w
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    1. Steenkamp, Daan & Erasmus, Ruan, 2022. "Term premium estimation for South Africa," MPRA Paper 114895, University Library of Munich, Germany.
    2. Gaygysyz Guljanov & Willi Mutschler & Mark Trede, 2022. "Pruned Skewed Kalman Filter and Smoother: With Application to the Yield Curve," CQE Working Papers 10122, Center for Quantitative Economics (CQE), University of Muenster.
    3. Makushkin, Mikhail & Lapshin, Victor, 2023. "Dynamic Nelson–Siegel model for market risk estimation of bonds: Practical implementation," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 69, pages 5-27.
    4. Frank J. Fabozzi & Francesco A. Fabozzi & Diana Tunaru, 2023. "A comparison of multi-factor term structure models for interbank rates," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 323-356, July.

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