Linearized Nelson–Siegel and Svensson models for the estimation of spot interest rates |
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Authors: | Geneviève Gauthier Jean-Guy Simonato |
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Institution: | 1. Department of Management Sciences, HEC Montréal, 3000 Côte-Sainte-Catherine, Montréal, Canada H3T 2A7;2. Department of Finance, HEC Montréal, 3000 Côte-Sainte- Catherine, Montréal, Canada H3T 2A7 |
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Abstract: | Linearized versions of the Nelson–Siegel (1987) and Svensson (1994) models for the cross-sectional estimation of spot yield curves from samples of coupon bonds are developed and analyzed. It is shown how these models can be made linear in the level, slope and curvature parameters and how prior information about these parameters can be incorporated in the estimation procedure. The performance of the linearized models are assessed in a Monte Carlo setting and with a sample of US government bonds. The results reveal that the linearized models compare favorably to the original models in terms of parameter estimates stability, computing effort and prevalence of local optima. |
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Keywords: | Term structure of interest rates Spot rate curves Coupon bonds Prior information Linearization |
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