An Arbitrage-free Nelson-Siegel Term Structure Model with Stochastic Volatility for the Determination of Currency Risk Premia PDF Download
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Author: Sarah Mouabbi
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Languages : en
Pages :
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Author: Sarah Mouabbi
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Languages : en
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Author: Zhiwu Hong
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Category :
Languages : en
Pages : 45
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We characterize the discrete-time arbitrage-free Nelson-Siegel term structure model, prove the uniqueness of the solution for model identification, make specification analysis on its canonical form, and detail the MCMC estimation method with a fast and reliable prior extraction step. Using the model, we examine how the yield curves of U.S. and China react to exchange rate policy shocks from China in its gradual reform to a more flexible exchange rate regime. Model decomposition reveals that, in U.S. yield responses, changes in risk premia for medium- to long-term yields dominate changes in yield expectation for short- to medium-term yields. The results are helpful to diagnosing market sentiment and exchange rate risk pricing as China further internationalizes its currency.
Author: Jens H. E. Christensen
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Category : Econometric models
Languages : en
Pages : 54
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We derive the class of arbitrage-free affine dynamic term structure models that approximate the widely-used Nelson-Siegel yield-curve specification. Our theoretical analysis relates this new class of models to the canonical representation of the three-factor arbitrage-free affine model. Our empirical analysis shows that imposing the Nelson-Siegel structure on this canonical representation greatly improves its empirical tractability; furthermore, we find that improvements in predictive performance are achieved from the imposition of absence of arbitrage.
Author: Linlin Niu
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Category :
Languages : en
Pages : 68
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We derive the discrete-time arbitrage-free Nelson-Siegel class of term structure models with an exact solution and proof of uniqueness. We design a fast and reliable estimation procedure based on reduced-dimension optimization with multistep embedded regressions. After an analytical illustration, we also show empirically that arbitrage-free restrictions have a bounded advantage for in-sample fit and out-of-sample forecast, compared to its reduced-form counterpart. However, the arbitrage-free model is a powerful tool for analysing risk premia associated with Level, Slope and Curvature factors. Our empirical results have interesting implications for both the US bond yield conundrum of 2004-05 and the recent financial crisis.
Author: Yi Yu
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Category : Economics, Finance and Accounting Theses
Languages : en
Pages : 0
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Author: Rui Chen
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Category :
Languages : en
Pages : 46
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We propose a generalized arbitrage-free Nelson-Siegel model under the HJM framework. It features unspanned stochastic volatility factors while maintaining a Nelson-Siegel factor loading structure. The price of the interest rate derivatives, including European options, Caps and Swaptions are then obtained in semi closed-form. We calibrate the model using an extensive panel data, including the US Libor rates, Swap rates, caps and swaptions. By estimating our model via the extended Kalman filter, we find strong evidence that our model prices interest rates and their derivatives accurately.
Author: Jens H. E. Christensen
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Category : Bonds
Languages : en
Pages : 32
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The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed, we show that the factor loadings of the Svensson generalization cannot be obtained in a standard finance arbitrage-free affine term structure representation. Therefore, we introduce a closely related generalized Nelson-Siegel model on which the no-arbitrage condition can be imposed. We estimate this new arbitrage-free generalized Nelson-Siegel model and demonstrate its tractability and good in-sample fit.
Author: Jens Henrik Eggert Christensen
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ISBN:
Category :
Languages : en
Pages : 38
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We derive the class of arbitrage-free affine dynamic term structure models that approximate the widely-used Nelson-Siegel yield-curve specification. Our theoretical analysis relates this new class of models to the canonical representation of the three-factor arbitrage-free affine model. Our empirical analysis shows that imposing the Nelson-Siegel structure on this canonical representation greatly improves its empirical tractability; furthermore, we find that improvements in predictive performance are achieved from the imposition of absence of arbitrage.
Author: Jens Henrik Eggert Christensen
Publisher:
ISBN:
Category :
Languages : en
Pages : 30
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Book Description
The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed, we show that the factor loadings of the Svensson generalization cannot be obtained in a standard finance arbitrage-free affine term structure representation. Therefore, we introduce a closely related generalized Nelson-Siegel model on which the no-arbitrage condition can be imposed. We estimate this new arbitrage-free generalized Nelson-Siegel model and demonstrate its tractability and good in-sample fit.
Author:
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Category :
Languages : en
Pages :
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