IDEAS home Printed from https://ideas.repec.org/p/ise/remwps/wp0352018.html
   My bibliography  Save this paper

A static approach to the Nelson-Siegel-Svensson model: an application for several negative yield cases

Author

Listed:
  • Maria Teresa Medeiros Garcia
  • Vítor Hugo Ferreira Carvalho

Abstract

The appearance of negative bond yields presents significant challenges for the fixed income markets, which mainly concern related forecasting models. The Nelson-Siegel-Svensson model (NSS) is one of the models that is most frequently used by central banks to estimate the term structure of interest rates. The objective of this study is to evaluate the application of the NSS model to fit the yield curve of a set of 20 countries, the majority from the Eurozone, which registered negative sovereign bond yields. We conclude that the model adjusted well for all countries’ yield curves, although no changes or constraints were introduced. In addition, a comparison was carried out between market instantaneous interest rate and the interest rate for the very distant future, which the model can predict, with good results for the instantaneous interest rate. An evaluation of the possible behaviour of shared debt securities (i.e. Eurobonds) was also analysed. In conclusion, the NSS model seems to remain a valuable, easy to use, and adaptable tool, to fit negative yield curves, for monetary policy institutions and market players alike.

Suggested Citation

  • Maria Teresa Medeiros Garcia & Vítor Hugo Ferreira Carvalho, 2018. "A static approach to the Nelson-Siegel-Svensson model: an application for several negative yield cases," Working Papers REM 2018/35, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
  • Handle: RePEc:ise:remwps:wp0352018
    as

    Download full text from publisher

    File URL: https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_035_2018.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fumio Hayashi & Edward C. Prescott, 2004. "The 1990s in Japan: a lost decade," Chapters, in: Paolo Onofri (ed.), The Economics of an Ageing Population, chapter 2, Edward Elgar Publishing.
    2. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    3. Manfred Gilli & Stefan Große & Enrico Schumann, 2010. "Calibrating the Nelson–Siegel–Svensson model," Working Papers 031, COMISEF.
    4. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Oct), pages 37-53.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eran Raviv, 2013. "Prediction Bias Correction for Dynamic Term Structure Models," Tinbergen Institute Discussion Papers 13-041/III, Tinbergen Institute.
    2. Virmani, Vineet, 2013. "On the Choice of Optimization Routine in Estimation of Parsimonious Term Structure Models: Results from the Svensson Model," IIMA Working Papers WP2013-01-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Asif Lakhany & Andrej Pintar & Amber Zhang, 2021. "Calibrating the Nelson-Siegel-Svensson Model by Genetic Algorithm," Papers 2108.01760, arXiv.org.
    4. Michał Brzoza-Brzezina & Jacek Kotłowski, 2014. "Measuring the natural yield curve," Applied Economics, Taylor & Francis Journals, vol. 46(17), pages 2052-2065, June.
    5. Cousin, Areski & Maatouk, Hassan & Rullière, Didier, 2016. "Kriging of financial term-structures," European Journal of Operational Research, Elsevier, vol. 255(2), pages 631-648.
    6. Grochola, Nicolaus, 2023. "The influence of negative interest rates on life insurance companies," ICIR Working Paper Series 53/23, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    7. Karahan, Cenk C. & Soykök, Emre, 2023. "On illiquidity of an emerging sovereign bond market," Economic Systems, Elsevier, vol. 47(2).
    8. Ryan Felushko & Eric Santor, 2006. "The International Monetary Fund's Balance-Sheet and Credit Risk," Staff Working Papers 06-21, Bank of Canada.
    9. Tim de Vries & Jakob de Haan, 2016. "Credit ratings and bond spreads of the GIIPS," Applied Economics Letters, Taylor & Francis Journals, vol. 23(2), pages 107-111, February.
    10. Balima, Hippolyte Weneyam, 2020. "Coups d’état and the cost of debt," Journal of Comparative Economics, Elsevier, vol. 48(3), pages 509-528.
    11. Morita, Hiroshi, 2014. "External shocks and Japanese business cycles: Evidence from a sign-restricted VAR model," Japan and the World Economy, Elsevier, vol. 30(C), pages 59-74.
    12. Fatih Ozatay, 2008. "Expansionary Fiscal Consolidations: New Evidence from Turkey," Working Papers 0805, TOBB University of Economics and Technology, Department of Economics.
    13. Carmen M. Reinhart, 2002. "Default, Currency Crises, and Sovereign Credit Ratings," The World Bank Economic Review, World Bank, vol. 16(2), pages 151-170, August.
    14. Juan Carlos Conesa & Timothy J. Kehoe & Kim J. Ruhl, 2007. "Modeling great depressions: the depression in Finland in the 1990s," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 31(Nov), pages 16-44.
    15. Hu, Xiaolu & Shi, Jing & Wang, Lafang & Yu, Jing, 2020. "Foreign ownership in Chinese credit ratings industry: Information revelation or certification?," Journal of Banking & Finance, Elsevier, vol. 118(C).
    16. Samir Jahjah & Bin Wei & Vivian Zhanwei Yue, 2013. "Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(7), pages 1275-1300, October.
    17. Malmaeus, J. Mikael & Alfredsson, Eva C., 2017. "Potential Consequences on the Economy of Low or No Growth - Short and Long Term Perspectives," Ecological Economics, Elsevier, vol. 134(C), pages 57-64.
    18. Patrycja Klusak & Matthew Agarwala & Matt Burke & Moritz Kraemer & Kamiar Mohaddes, 2023. "Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness," Management Science, INFORMS, vol. 69(12), pages 7468-7491, December.
    19. Peter Rowland, 2004. "Determinants Of Spread , Credit Rating And Creditworthiness For Emerging Market Sovereign Debt: A Panel Data Study," Borradores de Economia 2336, Banco de la Republica.
    20. Ho, Amy Yueh-Fang & Liang, Hsin-Yu & Jian, Jhih-Shan, 2023. "How does national culture affect the spillover effects of sovereign ratings on corporate ratings?," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 671-691.

    More about this item

    Keywords

    yield curve; negative bond yields; Eurobonds; Nelson-Siegel-Svensson model;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ise:remwps:wp0352018. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sandra Araújo (email available below). General contact details of provider: https://rem.rc.iseg.ulisboa.pt/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.