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Federal Reserve Bank of San Francisco
Working Paper Series
The affine arbitrage-free class of Nelson-Siegel term structure models
Jens H. E. Christensen
Francis X. Diebold
Glenn D. Rudebusch
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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Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, The affine arbitrage-free class of Nelson-Siegel term structure models, Federal Reserve Bank of San Francisco, Working Paper Series 2007-20, 2007.
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Keywords: Interest rates ; Econometric models
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