A Comparative Analysis of Parsimonious Yield Curve Models with Focus on the Nelson-Siegel, Svensson and Bliss Models

58 Pages Posted: 20 Jul 2020 Last revised: 21 Jan 2021

See all articles by Ranik Raaen Wahlstrøm

Ranik Raaen Wahlstrøm

Norwegian University of Science and Technology (NTNU) - NTNU Business School

Florentina Paraschiv

Norwegian University of Science and Technology, Faculty of Economics and Management, NTNU Business School; University of St. Gallen, Institute for Operations Research and Computational Finance

Michael Schürle

University of St. Gallen - School of Finance

Date Written: January 20, 2021

Abstract

We shed light on computational challenges when fitting the Nelson-Siegel, Bliss and Svensson parsimonious yield curve models to observed US Treasury securities with maturities up to 30 years. As model parameters have a specific financial meaning, the stability of their estimated values over time becomes relevant when their dynamic behavior is interpreted in risk-return models. Our study is the first in the literature that compares the stability of estimated model parameters among different parsimonious models and for different approaches for predefining initial parameter values. We find that the Nelson-Siegel parameter estimates are more stable and conserve their intrinsic economical interpretation. Results reveal in addition the patterns of confounding effects in the Svensson model. To obtain the most stable and intuitive parameter estimates over time, we recommend the use of the Nelson-Siegel model by taking initial parameter values derived from the observed yields. The implications of excluding Treasury bills, constraining parameters and reducing clusters across time to maturity are also investigated.

Keywords: Parsimonious yield curve models, Term structure, Monetary policy decisions, Non-linear least squares, Initial values

JEL Classification: E43, G12

Suggested Citation

Wahlstrøm, Ranik Raaen and Paraschiv, Florentina and Schürle, Michael, A Comparative Analysis of Parsimonious Yield Curve Models with Focus on the Nelson-Siegel, Svensson and Bliss Models (January 20, 2021). University of St.Gallen, School of Finance Research Paper No. 2020/06, Available at SSRN: https://ssrn.com/abstract=3600955 or http://dx.doi.org/10.2139/ssrn.3600955

Ranik Raaen Wahlstrøm (Contact Author)

Norwegian University of Science and Technology (NTNU) - NTNU Business School ( email )

Norway

Florentina Paraschiv

Norwegian University of Science and Technology, Faculty of Economics and Management, NTNU Business School ( email )

Klæbuveien 72
Trondheim, NO-7030
Norway

University of St. Gallen, Institute for Operations Research and Computational Finance ( email )

Bodanstrasse 6
St. Gallen, 9000
Switzerland

Michael Schürle

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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