The Affine Arbitrage-Free Class of Nelson-Siegel Term Structure Models

Authors

Francis X. Diebold

Glenn D. Rudebusch

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2007-20 | March 1, 2010

We derive the class of affine arbitrage-free dynamic term structure models that approximate the widely-used Nelson-Siegel yield curve specification. These arbitrage-free Nelson-Siegel (AFNS) models can be expressed as slightly restricted versions of the canonical representation of the three-factor affine arbitrage-free model. Imposing the Nelson-Siegel structure on the canonical model greatly facilitates estimation and can improve predictive performance. In the future, AFNS models appear likely to be a useful workhorse representation for term structure research.

Article Citation

Diebold, Francis X., Glenn D. Rudebusch, and Jens H. E. Christensen. 2007. “The Affine Arbitrage-Free Class of Nelson-Siegel Term Structure Models,” Federal Reserve Bank of San Francisco Working Paper 2007-20. Available at https://doi.org/10.24148/wp2007-20

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