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Examining the Nelson-Siegel Class of Term Structure Models

Author

Listed:
  • Michiel De Pooter

    (Erasmus Universiteit Rotterdam)

Abstract
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.

Suggested Citation

  • Michiel De Pooter, 2007. "Examining the Nelson-Siegel Class of Term Structure Models," Tinbergen Institute Discussion Papers 07-043/4, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20070043
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    File URL: https://papers.tinbergen.nl/07043.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Term structure of interest rates; Nelson-Siegel; Svensson; Forecasting; State-space model;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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