#07-37
The Affine Arbitrage-Free Class of
Nelson-Siegel Term Structure Models
Jens H.E. Christensen, Francis X. Diebold and Glenn D. Rudebusch
Abstract: We derive the class of arbitrage-free affine dynamic term structure models that approximate the widely-used Nelson-Siegel yield-curve specification. Our theoretical analysis relates
this new class of models to the canonical representation of the three-factor arbitrage-free
affine model. Our empirical analysis shows that imposing the Nelson-Siegel structure on
this canonical representation greatly improves its empirical tractability; furthermore, we find
that improvements in predictive performance are achieved from the imposition of absence of
arbitrage.
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