APPENDIX D

Parametric and non-parametric yield curve models

D.1 PARAMETRIC CURVE MODELLING

In this case the form of a yield curve is assumed to follow a particular pattern that can be modelled by a mathematical function with a small number of parameters. These parameters can then be supplied in place of the raw curve data.

The best-known parametric model for yield curve modelling is from Nelson and Siegel (1987) who proposed the following expression for a curve’s yield at an arbitrary maturity τ:

D.1
  • The four parameters β0, β1, β2 and λ define the curve.
  • This function matches a wide range of yield curve behaviours, such as sloped, flat, curved, ...

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