Estimating the spot rate curve using the Nelson-Siegel model

Ondertitel:a ridge regression approach

The NelsonSiegel model is widely used in practice for fitting the term structure of interest rates. Due to the ease in linearizing the model, a grid search or an OLS approach using a fixed shape parameter are popular estimation procedures. The estimated grid search parameters, however, have been reported (1) to behave erratically over time, and (2) to have relatively large variances. On the other hand, parameter estimates based on a fixed shape parameter, while avoiding multicollinearity, turn out to be too smooth. We show that the NelsonSiegel model can become heavily collinear depending on the estimated/fixed shape parameter. A simple procedure based on ridge regression can remedy the reported problems significantly.

Jaar van publicatie:2013

Trefwoorden:A1 Journal article

BOF-keylabel:ja

BOF-publication weight:1

CSS-citation score:1

Authors from:Higher Education

Toegankelijkheid:Closed