Linearized Nelson-Siegel and Svensson models for the estimation of spot interest rates

Linearized versions of the Nelson-Siegel (1987) and Svensson (1994) models for the cross-sectional estimation of spot yield curves from samples of coupon bonds are developed and analyzed. It is shown how these models can be made linear in the level, slope and curvature parameters and how prior information about these parameters can be incorporated in the estimation procedure. The performance of the linearized models are assessed in a Monte Carlo setting and with a sample of U.S. government bonds. The results reveal that the linearized models compare favorably to the original models in terms of parameter estimates stability, computing effort and prevalence of local optima. ∗Corresponding author: Jean-Guy Simonato, Department of finance, HEC Montréal, 3000 Côte-SainteCatherine, Montréal, H3T 2A7. Email: [email protected]; Gauthier acknowledge the financial support of the National Science and Engineering Research Council of Canada (NSERC) and HEC Montréal. Simonato acknowledges the financial support of HEC Montréal. We thank Mathieu Boudreault for helpful comments.