European Financial and Accounting Journal 2012, 7(2):36-55 | DOI: 10.18267/j.efaj.9

Term Structure Modelling by Using Nelson-Siegel Model

Hana Hladíková1, Jarmila Radová2
1 RNDr. Hana Hladíková, Ph.D. - Researcher; Department of Economics, Faculty of Economics, University of Economics Prague, W. Churchill sq. 4, 130 67 Prague, Czech Republic; <hana.hladikova@vse.cz>.
2 Doc. RNDr. Jarmila Radová, Ph.D. - Associate Professor; Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics Prague, W. Churchill sq. 4, 130 67 Prague, Czech Republic; <jarmila.radova@vse.cz>.

Zero coupon rates are not observable in the market for a range of maturities. Therefore, an estimation methodology is required to derive the zero coupon yield curves from observable data. If we deal with approximations of empirical data to create yield curves it is necessary to choose suitable mathematical functions. We use parametric model of Nelson and Siegel. The current mathematical apparatus employed for this kind of approximation is outlined. This theoretical background is applied to an estimation of the zero-coupon yield curve derived from the Czech coupon bond market. There are many methodologies and each can provide surprisingly different results. Nevertheless, each seeks to provide an estimation that fit the data well while maintaining an easily interpretable form. On an initial test data sample we have not faced any problems, reported elsewhere, of not having found the global optimum or having found multiple local minima.

Keywords: Nelson-Siegel model, Nonlinear least squares, Yield curve estimation
JEL classification: G30, M30

Published: June 1, 2012  Show citation

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Hladíková, H., & Radová, J. (2012). Term Structure Modelling by Using Nelson-Siegel Model. European Financial and Accounting Journal, 7(2), 36-55. doi: 10.18267/j.efaj.9
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