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Federal Reserve Bank of San Francisco
Working Paper Series
An arbitrage-free generalized Nelson-Siegel term structure model
Jens H. E. Christensen
Francis X. Diebold
Glenn D. Rudebusch
Abstract

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.


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Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, An arbitrage-free generalized Nelson-Siegel term structure model, Federal Reserve Bank of San Francisco, Working Paper Series 2008-07, 2008.
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Keywords: Interest rates ; Econometric models
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