Estimating the Yield Curve Using the Nelson-Siegel Model: A Ridge Regression Approach

Fixed income strategies based on the prediction of parameters in the NS model for the Spanish public debt market

“…This makes the final results sensitive both to the choice of the optimization routine and also to the starting values (initial guess) used in the optimization algorithm (see Virmani 2013, among others). Alternative proposals to deal with this issue can be found, for instance, in Bolder and Stréliski (1999) who suggest several global optimization algorithms based on grid search; Gimeno and Nave (2006) use genetic algorithms to find the values for the initial conditions and to reduce the risk of false convergence in the Spanish bond market, and Annaert et al (2013) incorporate a ridge regression approach to the grid search. Finally, other authors have fixed τ as a specific value congruent with observed data; Diebold and Li (2006) propose fixing the value of τ at 1.37, approximately, with annualized data, implying that the maximal value of the curvature component in the spot rate function will be reached at 2.5 years to maturity, as they observed throughout their original sample, while Fabozzi et al (2005) fixed τ at 3 with annualized data whose maximal curvature component was situated at 5.38 years.…”

“…Second, numerous authors have observed that the factors (level, slope and curvature) extracted from the NS model are insensitive to the choice of τ (see, among others, Nelson and Siegel 1987;Barrett et al 1995;Willner 1996;Dolan 1999;Czaja et al 2009;Favero et al 2012). More recently, Annaert et al (2013) estimated the parameters of the NS model for τ fixed at 1.37 (as in Diebold and Li 2006), and for τ fixed at 3 (as in Fabozzi et al 2005) for Euro spot rate curves, obtaining very similar results and being unable to conclude which of the two τ values is more suitable. We also estimated our results with τ fixed at 1.37 and they were found to be robust.…”

Yield Curve Estimation: An Empirical Evidence from the Tunisian Bond Market

“…The price of the second bond take an equation with two unknowns (the first coupon to be discounted at the first year's rate and the second coupon with the second year's rate), The rate for the first year being determined through the first bond, we can find without worry the rate of the second year, and then we can find all the ZC rates. The big problem with this method is that we have to have the bonds with successive maturities to be able to do the bootstrapping, something that is not always evident in the emerging markets (Annaert, Anouk G.P.Glaes, Mark J.K.De Ceuster, & Hairui Zhang [17]). …”

“…Then we sort the sample by ISIN code, this allows calculating the average of the quantity and the (Quantity1 15 *WAR) of all the treasury bills with the same ISIN code. Finally, to find the average WAR 16 we divide the (quantity1*WAR) by the quantity2 17 . Step2: The objective here is to find the theoretical prices.…”

A practical approach to constructing price-based funding liquidity factors

“…: ECB, 2008;Hodges & Parekh, 2006;Diebold & Li, 2006;Annaert, Claes, Ceuster, & Zhang, 2013). The model is based on the parsimonious parametric yield curve function proposed by Nelson and Siegel (1987):…”