How arbitrage-free is the Nelson-Siegel Model?

Arbeitspapier

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 fore-casting experiment.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 874

Classification and Topics

• Classification: Wirtschaft ; Semiparametric and Nonparametric Methods: General ; Statistical Simulation Methods: General ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Affine term structure models ; Nelson-Siegel model ; No-arbitrage restrictions ; non-parametric test ; Zinsstruktur ; Arbitrage Pricing ; Kapitaleinkommen ; Mathematische Optimierung ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Coroneo, Laura ; Nyholm, Ken ; Vidova-Koleva, Rositsa
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/153308
• Last update: 10.03.2025, 11:43 AM CET