# What is the Nelson Siegel model?

## What is the Nelson Siegel model?

Abstract. The Nelson-Siegel model is widely used in practice for fitting the term structure of interest rates. Due to the ease in linearizing the model, a grid search or an OLS approach using a fixed shape parameter are popular estimation procedures.

### How arbitrage free is the Nelson Siegel model?

Our results show that the Nelson Siegel factor loadings are not statisti- cally different from the implied no-arbitrage factor loadings at a 95 percent level of confidence. In an out-of-sample forecasting experiment, we show that the performance of the Nelson-Siegel model is as good as the no-arbitrage counterpart.

What is the term structure of interest rates?

Essentially, term structure of interest rates is the relationship between interest rates or bond yields and different terms or maturities. When graphed, the term structure of interest rates is known as a yield curve, and it plays a crucial role in identifying the current state of an economy.

What is key rate duration?

Key rate duration measures how the value of a debt security or a debt instrument portfolio, generally bonds, changes at a specific maturity point along the entirety of the yield curve.

## What is yield curve attribution?

Yield curve attribution. A more widely used approach to fixed-income attribution is to decompose the returns of individual securities by source of risk, and then to aggregate these risk-specific returns over an entire portfolio.

### What are three theories that explain the term structure of interest rates?

Historically, three competing theories have attracted the widest attention. These are known as the expectations, liquidity preference and hedging-pressure or preferred habitat theories of the term structure. the yield curve can be explained by investors’ expectations about future interest rates.

What is key rate exposure?

Key rate exposures help to describe the risk distribution along the term structure given a bond portfolio. They help describe how to execute the perfect hedge using highly liquid benchmark bonds.

What are key rates?

The key rate is the specific interest rate that determines bank lending rates and the cost of credit for borrowers. The two key interest rates in the U.S. are the discount rate and the federal funds rate.