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Yield Curve Modeling and Forecasting:
The Dynamic Nelson-Siegel Approach
Francis X. Diebold & Glenn D. Rudebusch

Book Description | Reviews
Chapter 1 [in PDF format]

TABLE OF CONTENTS:

List of Illustrations ix
Introduction xi
Preface xiii
Additional Acknowledgment xvii

1 Facts, Factors, and Questions 1

  • 1.1 Three Interest Rate Curves 2
  • 1.2 Zero-Coupon Yields 3
  • 1.3 Yield Curve Facts 4
  • 1.4 Yield Curve Factors 7
  • 1.5 Yield Curve Questions 13
  • 1.6 Onward 22

2 Dynamic Nelson-Siegel 23

  • 2.1 Curve Fitting 23
  • 2.2 Introducing Dynamics 26
  • 2.3 State-Space Representation 30
  • 2.4 Estimation 34
  • 2.5 Multicountry Modeling 42
  • 2.6 Risk Management 46
  • 2.7 DNS Fit and Forecasting 49

3 Arbitrage-Free Nelson-Siegel 55

  • 3.1 A Two-Factor Warm-Up 58
  • 3.2 The Duffie-Kan Framework 62
  • 3.3 Making DNS Arbitrage-Free 64
  • 3.4 Workhorse Models 78
  • 3.5 AFNS Restrictions on A0(3) 83
  • 3.6 Estimation 86
  • 3.7 AFNS Fit and Forecasting 90

4 Extensions 96

  • 4.1 Variations on the Basic Theme 96
  • 4.2 Additional Yield Factors 105
  • 4.3 Stochastic Volatility 113
  • 4.4 Macroeconomic Fundamentals 117

5 Macro-Finance 126

  • 5.1 Macro-Finance Yield Curve Modeling 126
  • 5.2 Macro-Finance and AFNS 131
  • 5.3 Evolving Research Directions 144

6 Epilogue 149

  • 6.1 Is Imposition of No-Arbitrage Helpful? 151
  • 6.2 Is AFNS the Only Tractable A0(3) Model? 153
  • 6.3 Is AFNS Special? 155

Appendixes 159
Appendix A Two-Factor AFNS Calculations 161

  • A.1 Risk-Neutral Probability 161
  • A.2 Euler Equation 163

Appendix B Details of AFNS Restrictions 166

  • B.1 Independent-Factor AFNS 168
  • B.2 Correlated-Factor AFNS 171

Appendix C The AFGNS Yield-Adjustment Term 174
Bibliography 179
Index 197

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File created: 11/11/2014

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