A shape-based decomposition of the yield adjustment term in the arbitrage-free Nelson and Siegel (AFNS) model of the yield

• Autores: James M. Steeley
• Localización: Applied financial economics, ISSN 0960-3107, Vol. 24, Nº. 10-12, 2014, págs. 661-669
• Idioma: inglés
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• Resumen

  • The appealing feature of the arbitrage-free Nelson-Siegel model of the yield curve is the ability to capture movements in the yield curve through readily interpretable shifts in its level, slope or curvature, all within a dynamic arbitrage-free framework. To ensure that the level, slope and curvature factors evolve so as not to admit arbitrage, the model introduces a yield-adjustment term. This paper shows how the yield-adjustment term can also be decomposed into the familiar level, slope and curvature elements plus some additional readily interpretable shape adjustments. This means that, even in an arbitrage-free setting, it continues to be possible to interpret movements in the yield curve in terms of level, slope and curvature influences.