A theoretical foundation for the Nelson and Siegel class of yield curve models

Release date
01/09/2009
Reference
DP2009/10
Author
Leo Krippner
Published as
Krippner, Leo (2015). ‘A theoretical foundation for the Nelson-Siegel class of yield curve models’, Journal of Applied Econometrics, Wiley, Volume 30(1), Pages 97-118, DOI: https://doi.org/10.1002/jae.2360.
This article establishes that most models within the popular and widely used Nelson and Siegel (1987, hereafter NS) class, with one notable exception being the Svensson (1995) variant, are effectively reduced-form representations of the generic Gaussian affine term structure model outlined in Dai and Singleton (2002). That fundamental theoretical foundation provides a compelling case for applying certain NS models as standard tools for yield curve analysis in economics and finance: users get the well-established pragmatic benefits of NS models along with an assurance that they correspond to a well-accepted set of principles and assumptions for modelling the yield curve and its dynamics.