The Estimation of Svensson Model Term Structures and Their Volatilities

33 Pages Posted: 8 May 2012

See all articles by Jan Annaert

Jan Annaert

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

Anouk G. P. Claes

Université Saint-Louis Brussels; 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

Universiteit Antwerpen; University of Antwerp - Antwerp Management School; Facultés Universitaires Saint Louis à Bruxelles

Date Written: May 4, 2012

Abstract

The Nelson-Siegel and the Svensson models are widely used in practice for fitting the term structure of interest rates. However, due to their highly non-linear nature and the potential danger of multicollinearity, numerical difficulties in estimating these models hamper their implementation. In this paper, a conditional ridge regression based approach is proposed to remedy the reported problems. The method we suggest produces – even in conditions of financial crises - non-negative and bounded theoretical long and short rates. Both its in-sample and out-of-sample performance are not dominated by other procedures. The out-of-sample performance is judged by the MAE between the rates and the volatilities of the EONIA or the 30-year swap rate and their model-extrapolated counterparts. Also the one-day GARCH(1,1) with student-t innovations forecasting ability of the short and long rates is among the best.

Keywords: Term Structure, Nelson-Siegel Model, Svensson Model, Ridge Regression

JEL Classification: E43, C51

Suggested Citation

Annaert, Jan and Claes, Anouk G. P. and de Ceuster, Marc J. K. and Zhang, Hairui, The Estimation of Svensson Model Term Structures and Their Volatilities (May 4, 2012). Available at SSRN: https://ssrn.com/abstract=2054693 or http://dx.doi.org/10.2139/ssrn.2054693

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/

University of Antwerp - Antwerp Management School ( email )

Boogkeers 5
Antwerp, 2000
Belgium

Anouk G. P. Claes

Université Saint-Louis Brussels ( email )

43 Boulevard du Jardin botanique
Brussels, 1000
Belgium
+32 / (0)2 792 35 15 (Phone)

HOME PAGE: http://www.usaintlouis.be/

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

Universiteit Antwerpen ( email )

Prinsstraat 13
Antwerp, 2000
Belgium

HOME PAGE: http://https://www.uantwerpen.be/en/staff/hairui-zhang/

University of Antwerp - Antwerp Management School ( email )

Boogkeers 5
Antwerp, 2000
Belgium

HOME PAGE: http://www.antwerpmanagementschool.be/en/faculty-research/faculty/zhang-hairui-e

Facultés Universitaires Saint Louis à Bruxelles ( email )

Boulevard du Jardin Botanique 43
Bruxelles, 1000
Belgium

HOME PAGE: http://www.usaintlouis.be/sl/4026048.html

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