Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153308
Authors: 
Coroneo, Laura
Nyholm, Ken
Vidova-Koleva, Rositsa
Year of Publication: 
2008
Series/Report no.: 
ECB Working Paper 874
Abstract: 
We test whether the Nelson and Siegel (1987) yield curve model is arbitrage-free in a statistical sense. Theoretically, the Nelson-Siegel model does not ensure the absence of arbitrage opportunities, as shown by Bjork and Christensen (1999). Still, central banks and public wealth managers rely heavily on it. Using a non-parametric resampling technique and zero-coupon yield curve data from the US market, we find that the no-arbitrage parameters are not statistically different from those obtained from the NS model, at a 95 percent confidence level. We therefore conclude that the Nelson and Siegel yield curve model is compatible with arbitrage-freeness. To corroborate this result, we show that the Nelson-Siegel model performs as well as its no-arbitrage counterpart in an out-of-sample fore-casting experiment.
Subjects: 
Affine term structure models
Nelson-Siegel model
No-arbitrage restrictions
non-parametric test
JEL: 
C14
C15
G12
Document Type: 
Working Paper

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