Estimating and Forecasting the Term Structure of Korea Markets Using the Nelson-Siegel Model

Joon Haeng Lee (Seoul Women’s University)

Journal of Derivatives and Quantitative Studies: 선물연구

ISSN: 1229-988X

Article publication date: 30 November 2004

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Abstract

This paper estimates and forecasts yield curve of korea bond market using a three factor term structure model based on the Nelson-Siegel model. The Nelson-Siegel model is in-terpreted as a model of level, slope and curvature and has the flexibility required to match the changing shape of the yield curve. To estimate this model, we use the two-step estima-tion procedure as in Diebold and Li. Estimation results show our model is Quite flexible and gives a very good fit to data.

To see the forecasting ability of our model, we compare the RMSEs (root mean square error) of our model to random walk (RW) model and principal component model for out-of sample period as well as in-sample period. we find that our model has better forecasting performances over principal component model but shows slight edge over RW model especially for long run forecasting period. Considering that it is difficult for any model to show better forecasting ability over the RW model in out-of-sample period, results suggest that our model is useful for practitioners to forecast yields curve dynamics.

Citation

Lee, J.H. (2004), "Estimating and Forecasting the Term Structure of Korea Markets Using the Nelson-Siegel Model", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 12 No. 2, pp. 101-126. https://doi.org/10.1108/JDQS-02-2004-B0005

Publisher

:

Emerald Publishing Limited

Copyright © 2004 Emerald Publishing Limited

License

This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode


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