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Calibrating the Dynamic Nelson-Siegel Model: A Practitioner Approach

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  • Ibanez, Francisco

Abstract

The dynamic version of the Nelson-Siegel model has shown useful applications in the investment management industry. These applications go from forecasting the yield curve to portfolio risk management. Because of the complexity in the estimation of the parameters, some practitioners are unable to benefit from the uses of this model. In this note we present two approximations to estimate the time series of the model's factors. The first one has a more technical aim, focusing on the construction of a representative base to work, and uses a genetic algorithm to face the optimization problem. The second approximation has a practitioner spirit, focusing on the easiness of implementation. The results show that both approximations have good fitting for the U.S. Treasury bonds market.

Suggested Citation

  • Ibanez, Francisco, 2015. "Calibrating the Dynamic Nelson-Siegel Model: A Practitioner Approach," MPRA Paper 68377, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68377
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    References listed on IDEAS

    as
    1. Francis X. Diebold & Lei Ji & Canlin Li, 2006. "A Three-Factor Yield Curve Model: Non-Affine Structure, Systematic Risk Sources and Generalized Duration," Chapters, in: Lawrence R. Klein (ed.), Long-run Growth and Short-run Stabilization, chapter 9, Edward Elgar Publishing.
    2. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    3. Manfred Gilli & Stefan Große & Enrico Schumann, 2010. "Calibrating the Nelson–Siegel–Svensson model," Working Papers 031, COMISEF.
    4. 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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    2. Tomasz P. Kostyra, 2022. "Yield Curve Modelling with the Nelson-Siegel Method for Poland," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 2, pages 44-56.

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    More about this item

    Keywords

    Yield curve; Curve fitting; Calibration; Nelson-Siegel;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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