An Arbitrage-Free Generalized Nelson-Siegel Term Structure Model
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NBER Working Paper No. 14463
Issued in November 2008
NBER Program(s): AP EFG IFM
The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed, we show that the factor loadings of the Svensson generalization cannot be obtained in a standard finance arbitrage-free affine term structure representation. Therefore, we introduce a closely related generalized Nelson-Siegel model on which the no-arbitrage condition can be imposed. We estimate this new arbitrage-free generalized Nelson-Siegel model and demonstrate its tractability and good in-sample fit.
Published: Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2009.
"An arbitrage-free generalized Nelson--Siegel term structure model,"
Econometrics Journal,
Royal Economic Society, vol. 12(3), pages C33-C64, November.
This paper is available as PDF (414 K) or via email.
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