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Nelson Siegel interest rate model calibration

[Unknown 2008/08/26 15:02 | by abiao ]
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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.


http://janroman.dhis.org/
http://janroman.dhis.org/finance/Excel/NelsonSiegelYieldCurveModel.xls
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