Analyzing the term structure of interest rates using the dynamic Nelson-Siegel model with time-varying parameters

S.J. Koopman, M.I.P. Mallee, M. van der Wel

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

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. © 2010 American Statistical Association.
Original languageEnglish
Pages (from-to)329-343
JournalJournal of Business and Economic Statistics
Volume28
DOIs
Publication statusPublished - 2010

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