Table of Contents
List of Illustrations ix
Introduction xi
Preface xiii
Additional Acknowledgment xvii
1 Facts, Factors, and Questions 1
- 1.1 Three Interest Rate Curves 2
- 1.2 Zero-Coupon Yields 3
- 1.3 Yield Curve Facts 4
- 1.4 Yield Curve Factors 7
- 1.5 Yield Curve Questions 13
- 1.6 Onward 22
2 Dynamic Nelson-Siegel 23
- 2.1 Curve Fitting 23
- 2.2 Introducing Dynamics 26
- 2.3 State-Space Representation 30
- 2.4 Estimation 34
- 2.5 Multicountry Modeling 42
- 2.6 Risk Management 46
- 2.7 DNS Fit and Forecasting 49
3 Arbitrage-Free Nelson-Siegel 55
- 3.1 A Two-Factor Warm-Up 58
- 3.2 The Duffie-Kan Framework 62
- 3.3 Making DNS Arbitrage-Free 64
- 3.4 Workhorse Models 78
- 3.5 AFNS Restrictions on A0(3) 83
- 3.6 Estimation 86
- 3.7 AFNS Fit and Forecasting 90
4 Extensions 96
- 4.1 Variations on the Basic Theme 96
- 4.2 Additional Yield Factors 105
- 4.3 Stochastic Volatility 113
- 4.4 Macroeconomic Fundamentals 117
5 Macro-Finance 126
- 5.1 Macro-Finance Yield Curve Modeling 126
- 5.2 Macro-Finance and AFNS 131
- 5.3 Evolving Research Directions 144
6 Epilogue 149
- 6.1 Is Imposition of No-Arbitrage Helpful? 151
- 6.2 Is AFNS the Only Tractable A0(3) Model? 153
- 6.3 Is AFNS Special? 155
Appendixes 159
Appendix A Two-Factor AFNS Calculations 161
- A.1 Risk-Neutral Probability 161
- A.2 Euler Equation 163
Appendix B Details of AFNS Restrictions 166
- B.1 Independent-Factor AFNS 168
- B.2 Correlated-Factor AFNS 171
Appendix C The AFGNS Yield-Adjustment Term 174
Bibliography 179
Index 197