Abstract

http://ssrn.com/abstract=2054689
 


 



Estimating the Yield Curve Using the Nelson-Siegel Model: A Ridge Regression Approach


Jan Annaert


University of Antwerp Department of Accounting & Finance; Antwerp Management School

Anouk G. P. Claes


Facultés Universitaires Saint-Louis, Faculté ESPO; University of Antwerp, Faculty of Applied Economics - City Campus

Marc J. K. De Ceuster


University of Antwerp - Faculty of Applied Economics - City Campus

Hairui Zhang


University of Antwerp; Antwerp Management School

May 8, 2012

International Review of Economics & Finance, Forthcoming

Abstract:     
The Nelson-Siegel 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 parameters, however, have been reported (1) to behave erratically over time, and (2) to have relatively large variances. We show that the Nelson-Siegel 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.

Number of Pages in PDF File: 44

Keywords: Smoothed Bootstrap, Ridge Regression, Nelson-Siegel, Spot Rates

JEL Classification: E43, C51

Accepted Paper Series


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Date posted: May 8, 2012 ; Last revised: February 19, 2013

Suggested Citation

Annaert, Jan and Claes, Anouk G. P. and de Ceuster, Marc J. K. and Zhang, Hairui, Estimating the Yield Curve Using the Nelson-Siegel Model: A Ridge Regression Approach (May 8, 2012). International Review of Economics & Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2054689 or http://dx.doi.org/10.2139/ssrn.2054689

Contact Information

Jan Annaert
University of Antwerp Department of Accounting & Finance ( email )
Faculty of Applied Economics
Prinsstraat 13
Antwerp, B-2000
Belgium
HOME PAGE: http://https://www.uantwerp.be/en/staff/jan-annaert/
Antwerp Management School ( email )
Het Brantijser
Sint-Jacobsmarkt 9-13
Antwerp, 2000
Belgium
Anouk G. P. Claes
Facultés Universitaires Saint-Louis, Faculté ESPO ( email )
Boulevard du Jardin Botanique 43
Brussels, 1000
Belgium
+32 2 787 93 15 (Phone)
University of Antwerp, Faculty of Applied Economics - City Campus ( email )
Prinsstraat 13
Antwerp, 2000
Belgium
+32 220 40 64 (Fax)
HOME PAGE: http://www.ua.ac.be/anouk.claes
Marc J. K. De Ceuster (Contact Author)
University of Antwerp - Faculty of Applied Economics - City Campus ( email )
Office B-337
Prinsstraat 13
Antwerp, Antwerp 2000
Belgium
+ 32 3 220 41 24 (Phone)
+ 32 3 220 40 64 (Fax)
HOME PAGE: http://www.ua.ac.be/marc.deceuster
Hairui Zhang
University of Antwerp ( email )
Prinsstraat 13
Antwerp, 2000
Belgium
HOME PAGE: http://www.ua.ac.be/main.aspx?c=hairui.zhang
Antwerp Management School ( email )
Het Brantijser
Sint-Jacobsmarkt 9-13
Antwerp, 2000
Belgium
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