A Rotated Dynamic Nelson-Siegel Model with Macro-Financial Applications

40 Pages Posted: 30 Sep 2015

See all articles by Ken Nyholm

Ken Nyholm

European Central Bank (ECB)

Date Written: September 29, 2015

Abstract

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

Nyholm, Ken, A Rotated Dynamic Nelson-Siegel Model with Macro-Financial Applications (September 29, 2015). ECB Working Paper No. 1851, Available at SSRN: https://ssrn.com/abstract=2666978

Ken Nyholm (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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