The deterministic shift extension and the affine dynamic Nelson–Siegel model |
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| Institution: | 1. Alef-servizi s.p.a., Viale Regina Margherita, 169, 00198 Roma, Italy;2. TELECOM Bretagne, LabSTICC/CID/SFIIS, Technopôle Brest Iroise CS 83818, 29238 Brest Cedex 3, France;1. Department of Banking and Finance, National Chiayi University, No. 580, Sinmin Road, Chiayi City 60054, Taiwan;2. Department of Finance, National Yunlin University of Science & Technology, No. 123, University Road, Section 3, Douliou City 64002, Taiwan;3. Department of Wealth and Taxation Management, National Kaohsiung University of Applied Sciences, No. 415, Chien-Kung Road, Sanmin District, Kaohsiung City 80778, Taiwan;4. Graduate Institute of Finance, National Pingtung University of Science and Technology, No. 1, Hseuhfu Road, Neipu, Pingtung 91201, Taiwan;1. IPAG Lab, IPAG Business School;2. European University Institute (EUI);3. Athens University of Economics and Business (AUEB);1. Department of Finance, Feng Chia University, Taiwan;2. Taiwan Academy of Banking and Finance, Taiwan;3. Department of Money and Banking, National Chengchi University, Taiwan |
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| Abstract: | The affine dynamic Nelson–Siegel model links the affine class of models with the Nelson–Siegel interpolation scheme of the yield curve. Its parameters are interpreted as the latent factors of the spot rate process driven by an affine diffusion. Using an appropriate specification of this diffusion, the yields become in form of the Nelson–Siegel model but an adjustment term is introduced. In this paper, the model is extended using a deterministic shift extension so as to perfectly fit the term structure and reduce the correction term. This enhancement allows to simulate the yield curve and the spot rate process consistently with the market data used for the calibration of the model. A numerical example discusses the calibration results of the original model and the proposed extension. |
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| Keywords: | Affine Calibration Interest rates Multi-factor Term structure |
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