Examining the Nelson-Siegel Class of Term Structure Models
2007-06-05
Research Paper
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In this paper I examine various extensions of the Nelson and Siegel (1987) model with the purpose of fitting and forecasting the term structure of interest rates. As expected, I find that using more flexible models leads to a better in-sample fit of the term structure. However, I show that the out-of-sample predictability improves as well. The four-factor model, which adds a second slope factor to the three-factor Nelson-Siegel model, forecasts particularly well. Especially with a one-step state-space estimation approach the four-factor model produces accurate forecasts and outperforms competitor models across maturities and forecast horizons. Subsample analysis shows that this outperformance is also consistent over time.
Keywords
Classifications using
Journal of Economic Literature (JEL) Classification System
- E4 : Money and Interest Rates
- C5 : Econometric Modeling
- C32 : Time-Series Models; Dynamic Quantile Regressions
Automatically Extracted Terms
- model
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- 0.99
- factor
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- maturity
- 0.98
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- parameter
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- term structure
- forecast
