Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2007-12-07 Number: 07-095/4 Author-Name: Siem Jan Koopman Author-Email: firstname.lastname@example.org Author-Workplace-Name: VU University Amsterdam Author-Name: Max I.P. Mallee Author-Email: email@example.com Author-Workplace-Name: VU University Amsterdam Author-Name: Michel van der Wel Author-Email: firstname.lastname@example.org Author-Workplace-Name: VU University Amsterdam Title: Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters Abstract: This discussion paper has resulted in a publication in the Journal of Business and Economic Statistics, 2010, 28(3), 329-343.
In this discussion paper we introduce time-varying parameters in the dynamic Nelson–Siegel yield curve model for the simultaneous analysis and forecasting of interest rates of different maturities. The Nelson–Siegel model has been recently reformulated as a dynamic factor model with vector autoregressive factors. We extend this framework in two directions. First, the factor loadings in the Nelson–Siegel yield model depend on a single loading parameter that we treat as the fourth latent factor. Second, we specify the overall volatility as a generalized autoregressive conditional heteroscedasticity (GARCH) process. We present empirical evidence of considerable increases in within-sample goodness of fit for these advances in the dynamic Nelson–Siegel model. Classification-JEL: C32; C51; E43 Keywords: Yield Curve; Time-varying Volatility; Spline Functions; Kalman Filter; Missing Values File-Url: http://papers.tinbergen.nl/07095.pdf File-Format: application/pdf File-Size: 519262 bytes Handle: RePEc:tin:wpaper:20070095