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Aug 26

Nelson Siegel interest rate model calibration

Posted by abiao at 15:02 | Code » VBA/Excel | Comments(1) | Reads(35327)
Often we need to model the yield curve for bond pricing and risk analysis purpose, for instance,

The valuation of products requires the modelling of the entire covariance structure. Historical estimation of such large covariance matrices is statistically not tractable anymore.
Need strong structure to be imposed on the co-movements of financial quantities of interest.
Specify the dynamics of a small number of variables (e.g. PCA).
Correlation structure among observable quantities can now be obtained analytically or numerically.
Simultaneous pricing of di erent options and hedging instruments in a consistent framework.

There are dozens of interest rate models used by practioners, Nelson-Siegel term structure model is one of them gained popularity. here is a spreedsheet showing how to fit Extended Nelson Siegel Spot Rate with Solver.


Find the spot rate uptill nest coupon using Nelson-Siegel Model when settlement date is 15th March 2003 & nest coupon is 23rd September 2003, Beta0=8, Beta 1=-1.85,Beta2=-4 and tau = 15.
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