An Arbitrage-Free Generalized Nelson-Siegel Term Structure Model


Francis X. Diebold

Glenn D. Rudebusch

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2008-07 | May 1, 2008

The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed, we show that the factor loadings of the Svensson generalization cannot be obtained in a standard finance arbitrage-free affine term structure representation. Therefore, we introduce a closely related generalized Nelson-Siegel model on which the no-arbitrage condition can be imposed. We estimate this new arbitrage-free generalized Nelson-Siegel model and demonstrate its tractability and good in-sample fit.

Article Citation

Diebold, Francis X., Glenn D. Rudebusch, and Jens H. E. Christensen. 2008. “An Arbitrage-Free Generalized Nelson-Siegel Term Structure Model,” Federal Reserve Bank of San Francisco Working Paper 2008-07. Available at

About the Author
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Jens Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Jens Christensen