A Rotated Dynamic Nelson-Siegel Model with Macro-Financial Applications
40 Pages Posted: 30 Sep 2015
Date Written: September 29, 2015
A factor rotation scheme is applied to the well-known Dynamic Nelson-Siegel model facilitating direct parametrization of the short rate process. The model-implied term structure of term premia is derived in closed-form, and macroeconomic variables are included in a Taylor-rule- type fashion. Four empirical experiments are performed on US data covering the period from 1990 to 2014. It is found that macroeconomic variables impact the evolution of the short rate until 2002, after which their effects become insignificant in a statistical sense. The calculated term structure of term premia is robust to the tested parameterzations, and traces out the interest rate cycles present in the data.
Keywords: yield curve modeling, dynamic Nelson-Siegel model, term premia, factor rotation, policy rate, state space model
JEL Classification: G1, E4, C5
Suggested Citation: Suggested Citation