On the Reconciliation of the Extended Nelson-Siegel and the Extended Vasicek Models (with a View Towards Swap and Swaption Valuation)

27 Pages Posted: 24 Mar 2013

See all articles by Peter Løchte Jørgensen

Peter Løchte Jørgensen

University of Aarhus - Business and Social Sciences

Date Written: March 20, 2013

Abstract

Extended Nelson-Siegel models are widely used by e.g. practitioners and central banks to estimate current term structures of riskless zero-coupon interest rates, whereas other models such as the extended Vasicek model (a.k.a. the Hull-White model) are popular for pricing interest rate derivatives. This paper establishes theoretical consistency between these two types of models by showing how to specify the extended Vasicek model such that its implied initial term structure curve precisely matches a given extended Nelson-Siegel specification. That is, we show how to reconcile the two classes of models at the initial time point (and here only). A case study and some illustrative numerical examples involving swaps and swaption pricing are provided at the end of the paper.

Keywords: Term structure of interest rates, Nelson-Siegel models, extended Vasicek model, term structure curve fitting, interest rate swaps and swaptions

JEL Classification: G12, G13, G23

Suggested Citation

Jørgensen, Peter Løchte, On the Reconciliation of the Extended Nelson-Siegel and the Extended Vasicek Models (with a View Towards Swap and Swaption Valuation) (March 20, 2013). Available at SSRN: https://ssrn.com/abstract=2237472 or http://dx.doi.org/10.2139/ssrn.2237472

Peter Løchte Jørgensen (Contact Author)

University of Aarhus - Business and Social Sciences ( email )

Finance Research Group
Fuglesangs Allé 4
DK-8210 Aarhus, 8210
Denmark
+4587165117 (Phone)

HOME PAGE: http://pure.au.dk/portal/en/plj@econ.au.dk

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