A Generalised Arbitrage-free Nelson-siegel Model: The Impact Of Unspanned Stochastic Volatility

Academic Press Inc Elsevier Science
Publication Type:
Journal Article
Finance Research Letters, 2013, 10 (1), pp. 41 - 48
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Although statistical term structure models provide exceptional in-sample fitting and out-of-sample forecasting of interest rates, the lack of theoretical background is criticized by academics and practitioners, such as the absent of arbitrage free. In this paper we develop a general Arbitrage-Free NelsonSiegel model under the HJM framework. It features unspanned stochastic volatility factors while maintaining a NelsonSiegel factor loading structure. This paper also exploits the potential to jointly model the interest rates and their derivatives.
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