Post by Sapphire Capital on Aug 19, 2008 23:52:09 GMT 4
Linearized Nelson-Siegel Models for the Estimation of Spot Interest Rates
Genevieve Gauthier
HEC Montreal
Jean-Guy Simonato
HEC Montréal
July 9, 2008
Abstract:
A widely used method for estimating the term structure of spot interest rates is the flexible functional form approach of Nelson and Siegel (1987). A difficulty with this method is the multiplicity of local optima obtained when estimating the parameters with non-linear least-squares procedures on cross-sections of coupon bond prices. Possible solutions to this problem often require important computing resources. We therefore develop linearized versions of the Nelson-Siegel model lowering the computational resources required to estimate spot interest rates with samples of coupon bond prices. The parameters of the linearized versions retain the financial interpretation of the original Nelson-Siegel parameters but involve only one or two-dimensions over which a non-linear search must be performed. Probabilistic approaches searching for the global optimum can then be carried out in a fra
ction of the time required by the original specification. The proposed models also allow introducing prior information about the parameters for which a financial interpretation is available. As shown in simulation studies, this prior information improves the precision of the estimated parameters and zero-coupon yields.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1157617_code218233.pdf?abstractid=1157617&mirid=2
Genevieve Gauthier
HEC Montreal
Jean-Guy Simonato
HEC Montréal
July 9, 2008
Abstract:
A widely used method for estimating the term structure of spot interest rates is the flexible functional form approach of Nelson and Siegel (1987). A difficulty with this method is the multiplicity of local optima obtained when estimating the parameters with non-linear least-squares procedures on cross-sections of coupon bond prices. Possible solutions to this problem often require important computing resources. We therefore develop linearized versions of the Nelson-Siegel model lowering the computational resources required to estimate spot interest rates with samples of coupon bond prices. The parameters of the linearized versions retain the financial interpretation of the original Nelson-Siegel parameters but involve only one or two-dimensions over which a non-linear search must be performed. Probabilistic approaches searching for the global optimum can then be carried out in a fra
ction of the time required by the original specification. The proposed models also allow introducing prior information about the parameters for which a financial interpretation is available. As shown in simulation studies, this prior information improves the precision of the estimated parameters and zero-coupon yields.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1157617_code218233.pdf?abstractid=1157617&mirid=2