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Jens H. E. Christensen, Francis X. Diebold, Glenn D. Rudebusch
NBER Working Paper No. 13611
Issued in November 2007
NBER Program(s): AP
EFG
IFM
---- Abstract -----
We derive the class of arbitrage-free affine dynamic term structure models that approximate the widely-used Nelson-Siegel yield-curve specification. Our theoretical analysis relates this new class of models to the canonical representation of the three-factor arbitrage-free affine model. Our empirical analysis shows that imposing the Nelson-Siegel structure on this canonical representation greatly improves its empirical tractability; furthermore, we find that improvements in predictive performance are achieved from the imposition of absence of arbitrage.
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