|Institution:||University of Texas – Austin|
|Keywords:||Nelson-Siegel model; Arbitrage free; Yield curve|
|Full text PDF:||http://hdl.handle.net/2152/22587|
Since arbitrage-free is a desirable theoretical feature in a healthy financial market, many efforts have been made to construct arbitrage-free models for yield curves. However, little attention is paid to review if such restriction will improve yield forecast. We evaluate the importance of arbitrage-free restriction on dynamic Nelson-Siegel term structure when forecasting yield curves. We find that it doesn’t help. We also compare these two Nelson-Siegel dynamic models with a benchmark dynamic model and show that Nelson-Siegel structure improve forecasts for long-maturity yields.