How arbitrage-free is the Nelson-Siegel model?
Coroneo, Laura (Universite Libre de Bruxelles)
Nyholm, Ken (European Central Bank)
Vidova-Koleva, Rositsa (Universitat Autònoma de Barcelona)
European Central Bank

Imprint:	Frankfurt am Main : European Central Bank, 2008
Description:	60 pag.
Abstract:	We test whether the Nelson and Siegel (1987) yield curve model is arbitrage-free in a statistical sense. Theoretically, the Nelson-Siegel model does not ensure the absence of arbitrage opportunities, as shown by Bjork and Christensen (1999). Still, central banks and public wealth managers rely heavily on it. Using a non-parametric resampling technique and zero-coupon yield curve data from the US market, we find that the no-arbitrage parameters are not statistically different from those obtained from the NS model, at a 95 percent confidence level. We therefore conclude that the Nelson and Siegel yield curve model is compatible with arbitrage-freeness. To corroborate this result, we show that the Nelson-Siegel model performs as well as its no-arbitrage counterpart in an out-of-sample forecasting experiment.
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Language:	Anglès
Series:	Working paper series (European Central Bank) ; 874
Document:	Working paper
Subject:	Nelson-Siegel model ; No-arbitrage restrictions ; Affine term structure models ; Non-parametric test
ISBN:	1561-0810
Published in:	ECB Working Paper, Núm. 874 (febrer 2008) , ISSN 1725-2806

Adreça alternativa: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp874.pdf

60 p, 1.2 MB

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Research literature > Working papers