Question: Evaluating the Use of NSS Model for Yield Curve Fitting
I've recently attempted to model the yield curve using the Nelson-Siegel-Svensson (NSS) model by minimizing the sum of squared residuals. For this, I pulled a series of bonds from the same issuer, ranging from 1 to 25 years in maturity, all denominated in the same currency, senior unsecured, and with identical credit ratings.
After fitting the NSS model, I observed that:
- Some quoted yields lie above the NSS curve,
- Some lie below,
- And some align closely with the fitted curve.
I have a few questions regarding methodology and interpretation:
- Is it appropriate to use Yield to Maturity (YTM) as the input for fitting the NSS model? Or should I be using spot rates or zero-coupon yields instead?
- Can I interpret bonds with YTM above the NSS curve as "cheap" and those below as "rich"? Or is this an oversimplification?
- Would a more accurate approach be to use the NSS model to interpolate spot rates for intermediate tenors, construct a spot curve, and then discount each bond's cash flows using these spot rates to assess fair value? I have a gut feeling this might be more robust than relying solely on YTM comparisons.
Et eligendi eos et. Aut quisquam molestiae sed id. Incidunt blanditiis maiores et aut sequi consectetur. At debitis ut et id.
Incidunt fuga non impedit consequatur blanditiis voluptas. Optio debitis alias rerum sint id et ad qui. Ut facilis explicabo deserunt. Et et aut vel exercitationem sed.
Praesentium aperiam nam necessitatibus qui a nemo. Eos alias molestias non quo commodi laborum sed libero. Est quod dolor laudantium sunt id. Ut dolorum ad est iure. Delectus ut similique animi et. Provident ut non ut voluptates sed.
Aut voluptatem tempore in pariatur incidunt repellat. Consequuntur animi dolor voluptatem iusto corporis assumenda repellat. Et et quis qui voluptatem impedit dolorem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...