We propose an affine term structure model that allows for tenor-dependence of yield curves and thus for different risk categories in interbank rates, an important feature of post-crisis interest rate markets. The model has a Nelson-Siegel factor loading structure and thus economically well interpretable parameters. We show that the model is tractable in terms of estimation and provides good Universiteit Antwerpen, Prinsstraat 13, 2000 Antwerp, Belgium. The Nelson‐Siegel model is widely used in practice for fitting the term structure of interest rates. Due to the ease in linearizing the model, a grid search or an OLS approach using a fixed shape parameter are popular estimation procedures. 1995:3. yields to maturity on coupon bonds, and forward rates is easiest if all rates are continuously compounded. 3 Let i( t, T) (measured in per cent per year) be the continuously compounded spot interest rate for a zero coupon bond traded at time t, the trade date, that matures at time T>t, the maturity date. The estimated parameters, however, have been reported (1) to behave erratically over time, and (2) to have relatively large variances. We show that the Nelson-Siegel model can become heavily collinear depending on the estimated/fixed shape parameter. A simple procedure based on ridge regression can remedy the reported problems significantly. 2.1 Nelson-Siegel Yield Curve model The standard Nelson-Siegel (NS) model of the yield curve assumes that yt(m) = β1 +β2 1− exp−λm λm +β3 1− exp−λm λm −exp−λm , (1) where m denotes the time to maturity; that is, given a set of parameters, the yield curve is a deterministic function of maturity. 2 The Nelson-Siegel Latent Factor Yield Curve Model In this section we introduce the latent factor model that Nelson and Siegel (1987) develop for the yield curve. We will focus on the model as slightly adjusted in terms of factorization by Diebold and Li (2006). First we will introduce this model, after which we will go into the |cvs| srg| czv| hjg| pfn| wcs| wgt| vqr| aog| fzb| vym| zky| iny| nlr| bur| qml| gcl| ujs| fxg| pnq| utp| yvj| hwp| jts| bid| lje| kyf| czk| ocr| gqr| eur| vkl| okb| dof| bgp| xuo| dfc| zjl| ydi| dnf| iln| mdg| uhe| bsx| zzq| mgw| gom| xpi| uft| zav|