Analyzing the Term Structure of Interest Rates Using the Dynamic Nelson-Siegel Model With Time-Varying Parameters

In this article we introduce time-varying parameters in the dynamic Nelson-Siegel yield curve model for the simultaneous analysis and forecasting of interest rates of different maturities. The Nelson-Siegel model has been recently reformulated as a dynamic factor model with vector autoregressive fac...

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Bibliographic Details
Published inJournal of business & economic statistics Vol. 28; no. 3; pp. 329 - 343
Main Authors Koopman, Siem Jan, Mallee, Max I. P., Van der Wel, Michel
Format Journal Article
LanguageEnglish
Published Alexandria Taylor & Francis 01.07.2010
American Statistical Association
Taylor & Francis Ltd
Subjects
Curvature
Dynamic modeling
Economic forecasting models
Economic models
Extended Kalman filter
Forecasting
Generalized autoregressive conditional heteroscedasticity model
Interest rates
Mathematical vectors
Maturity
Modeling
Parametric models
Regression analysis
Statistical variance
Stochastic models
Studies
Time series forecasting
Time-varying volatility
Yield curve
Yield curves
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Summary:In this article we introduce time-varying parameters in the dynamic Nelson-Siegel yield curve model for the simultaneous analysis and forecasting of interest rates of different maturities. The Nelson-Siegel model has been recently reformulated as a dynamic factor model with vector autoregressive factors. We extend this framework in two directions. First, the factor loadings in the Nelson-Siegel yield model depend on a single loading parameter that we treat as the fourth latent factor. Second, we specify the overall volatility as a generalized autoregressive conditional heteroscedasticity (GARCH) process. We present empirical evidence of considerable increases in within-sample goodness of fit for these advances in the dynamic Nelson-Siegel model.
ISSN:0735-0015
1537-2707
DOI:10.1198/jbes.2009.07295