Nelson Siegel Svansson

Popular way to model the yield curve called Nelson-Siegel-Svannson algorithm

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Updated 19 Sep 2022

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📚 Nelson-Siegel-Svannson algorithm 📚


Popular algorithm for fitting a yield curve to obseved data.

Problem

Data on bond yields is usualy avalible only for a small set of maturities, while the user is normaly interested in a wider range of yields.

Solution

A popular solution is to use an algorithm to find a function that fits the existing datapoints. This way, the function can be used to interpolate/extrapolate any other point. The Nelson-Siegel-Svannson model is a curve-fitting-algorithm that is flexible enough to approximate most real world applications.

The Nelson-Siegel-Svensson is an extension of the 4-parameter Nelson-Siegel method to 6 parameters. The Scennson introduced two extra parameters to better fit the variety of shapes of either the instantaneous forward rate or yield curves that are observed in practice.

Advantages:

  • It produces a smooth and well behaved forward rate curve.
  • The intuitive explanation of the parameters. beta0 is the long term interest rate and beta0+beta1 is the instantaneous short-term rate.

To find the optimal value of the parameters, the Nelder-Mead simplex algorithm is used (Already implemented in Matlab's fminsearch function). The link to the optimization algorithm is Gao, F. and Han, L. Implementing the Nelder-Mead simplex algorithm with adaptive parameters. 2012. Computational Optimization and Applications. 51:1, pp. 259-277.

The furmula for the yield curve (Value of the yield for a maturity at time 't') is given by the formula:

formula + formula formula + formula formula + formula formula

Parameters

  • Observed yield rates YieldVec.
  • Maturity of each observed yield TimeVec.
  • Initial guess for parameters beta0, beta1, beta2, beta3, labda0, and lambda1.
  • Target maturities TimeResultVec.

Desired output

  • Calculated yield rates for maturities of interest TimeResultVec.

Getting started

The user is interested in the projected yield for government bonds with a maturity in 1,2,5,10,25,30, and 31 years. They have data on government bonds maturing in 1,2,5,10, and 25 years. The calculated yield for those bonds are 0.39%, 0.61%, 1.66%, 2.58%, and 3.32%.

TimeVec = [1; 2; 5; 10; 25];
YieldVec = [0.0039; 0.0061; 0.0166; 0.0258; 0.0332];
beta0   = 0.1; % initial guess
beta1   = 0.1; % initial guess
beta2   = 0.1; % initial guess
beta3   = 0.1; % initial guess
lambda0 = 1;   % initial guess
lambda1 = 1;   % initial guess

TimeResultVec = [1; 2; 5; 10; 25; 30; 31]; % Maturities for yields that we are interested in

%% Implementation
OptiParam = NSSMinimize(beta0, beta1, beta2, beta3, lambda0, lambda1, TimeVec, YieldVec); % The Nelder-Mead simplex algorithem is used to find the parameters that result in a curve with the minimum residuals compared to the market data.
disp("Optimal parameters are")
disp(OptiParam)

ResultYield = NelsonSiegelSvansson(TimeResultVec, OptiParam(1), OptiParam(2), OptiParam(3), OptiParam(4), OptiParam(5), OptiParam(6)); % Calculate the yield for tergeted maturities using the calibrated partameters

Cite As

Gregor Fabjan (2023). Nelson Siegel Svansson (https://github.com/qnity/nelson_siegel_svansson_matlab), GitHub. Retrieved .

MATLAB Release Compatibility
Created with R2022a
Compatible with any release
Platform Compatibility
Windows macOS Linux
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Version Published Release Notes
1.0.0

To view or report issues in this GitHub add-on, visit the GitHub Repository.
To view or report issues in this GitHub add-on, visit the GitHub Repository.