IMPORTANT INSTALLATION INFORMATION

Programmed by and copyright Kurt Hess March 2004, kurthess@waikato.ac.nz

Illustration of Extended Nelson & Siegel Spot Rate Model
Fitting Extended Nelson & Siegel Spot Rate with Solver
The SOLVER macros in this workbook will only run if your Excel is set up
as follows.

You must have SOLVER installed with your Excel.
Go to Tools Menu and see whether item Solver appears there.
If it does not, go to Tools - Add-ins and tick "Solver Add-in".

This 1st step will allow you to use SOLVER from Excel but because SOLVER is
also called by a VBA macro, you will also need to establish a reference to the
Solver add-in in the VBA editor:
With a Visual Basic module active, click References on the Tools menu, and
then select the Solver.xla check box under Available References. If Solver.xla
doesn't appear under Available References, click Browse and open Solver.xla in
the \Office\Library subfolder.

Kurt Hess, kurthess@waikato.ac.nz 199512653.xls.ms_office Introduction 1/2/2014
Illustration of Extended Nelson & Siegel Spot Rate Model
programmed by Kurt Hess May 2004, kurthess@waikato.ac.nz
Time to maturity m 3.0 30.00
Long-run levels of interest rates
|
0 5.0% 50
Short-run component
|
1 2.0% 120
Medium-term component
|
2 8.0% 80 determines magnitude and the direction of the hump
Decay parameter 1
t
1 1.000 100
determines decay of short-term component, must be > 0
Decay parameter 2
t
2 1.200 120
determines decay of medium-term component, must be > 0
Spot rate at time t
r
t,i 7.9141%
7.9141% with VBA Function
Components of N&S spot rate
Comp 1 5.000% |
0
Comp 2 0.633% |
1
*((1-EXP(-m/tau1))/(m/tau1))
Comp 3 2.281% |
2
*((1-EXP(-m/tau2))/(m/tau2)-EXP(-m/tau2))
7.91%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
0 2 4 6 8 10 12
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
0 2 4 6 8 10
( )
( )
( )
2 1 2 1 0
2
,
,
2
2
1
1 0 ,
, , , ,
, 0 ~
1 1
,
2
2 1
t t | | |
o c
c
t
|
t
| |
t
t t
= O
+
|
|
|
.
|

\
|

+
|
|
|
.
|

\
|

+ = O
|
.
|

\
|

|
.
|

\
|

|
.
|

\
|

N with
e
m
e
m
e
m r
j t
j t
m m
j t
m
Kurt Hess, Waikato Management School Page 2 199512653.xls.ms_office Extended Nelson Siegel 1/2/2014
Fitting Extended Nelson & Siegel Spot Rate with Solver programmed by Kurt Hess May 2004, kurthess@waikato.ac.nz
Time to maturity m 3.0 30
Long-run levels of interest rates |
0 7.30% 73.02474
Short-run component |
1 -2.80% 71.97526
Medium-term component |
2 -1.40% -14.0174 determines magnitude and the direction of the hump
Decay parameter 1 t
1 0.412 41.19045
determines decay of short-term component, must be > 0
Decay parameter 2 t
2 2.905 290.466
determines decay of medium-term component, must be > 0
Spot rate at time t r
t,i 6.5429%
Objective Functions see formulas
Non-weighted objective function x10
3
0.200134
Inverse duration weighted function x 10
5
0.028763
Initial Guess Values:
Bond Data
Short-term rate 4.50%
Settlement date 14-Feb-99
Issuer Coupon Maturity Bid Ask Mid Clean Mid Dirty
Model
Price
Duration Weights (w
i
) (cheap) / rich
NZ Government 6.50% 15-Feb-00 100.563 100.583 100.57% 103.80% 103.573% 0.956271 0.361346082 0.23%
NZ Government 8.00% 15-Feb-01 102.786 102.854 102.82% 106.80% 106.742% 1.821322 0.189721979 0.06%
NZ Government 10.00% 15-Mar-02 108.406 108.526 108.47% 112.60% 113.399% 2.647526 0.130516077 (0.79%)
NZ Government 5.50% 15-Apr-03 96.673 96.827 96.75% 98.57% 97.483% 3.706899 0.093216656 1.08%
NZ Government 8.00% 15-Apr-04 105.034 105.234 105.13% 107.78% 108.039% 4.253648 0.081234908 (0.26%)
NZ Government 8.00% 15-Nov-06 106.518 106.809 106.66% 108.64% 108.878% 5.884208 0.058724089 (0.24%)
NZ Government 7.00% 15-Jul-09 100.549 100.903 100.73% 101.29% 101.176% 7.537708 0.045842151 0.11%
NZ Government 6.00% 15-Nov-11 91.666 92.049 91.86% 93.34% 93.343% 8.770603 0.039398058 (0.00%)
Total 1
6.54%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
0 2 4 6 8 10
N&S Zero Rate
0.82178
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
0 2 4 6
N&S Discount Factors
Minimize
Minimize
Default Values Set Random Values
Step through
optimization
Kurt Hess, Waikato Management School Page 3 199512653.xls.ms_office Fitting Bond Universe 1/2/2014
Formula Objective Function back to top Extended Nelson Siegel Model (parameters explained on top)
D: Duration
Pi: Price of bond i
^P
i
: Model price of bond i
N: number of bonds in universe
Subject to:
Rate r at time 0 must remain positive (m
min
is a value just slightly larger than 0)
Rate at the end of the estimation horizon must remain positive
Discount functions must be non-increasing
References:
Nelson, C. R. & Siegel, A. F. (1987). Parsimonious modeling of yield curves, Journal of Business 60(4): 473489.
as discussed in
Bliss, R. R. (1997). Testing Term Structure Estimation Methods. Advances in Futures and Options Research(9), 197-
231.
( )
i i i
N
j
j
i
i
N
i
i i
P P
D
D
w
w
=
=
|
.
|

\
|

=
=

1
1
min
1
1
2
c
c
( )
( )
( ) ( ) ( ) ( )
max 1 1
min
exp exp
0
0
m m m m r m m r
m r
m r
k k k k k
< >
= s
s
+ +
( )
( )
( )
2 1 2 1 0
2
,
2
2
1
1 0
, , , ,
, 0 ~
1 1
,
2
2 1
t t | | |
o c
t
|
t
| |
t
t t
= O
|
|
|
.
|

\
|

+
|
|
|
.
|

\
|

+ = O
|
.
|

\
|

|
.
|

\
|
|
.
|

\
|

N with
e
m
e
m
e
m r
j t
m m
j
m
Kurt Hess, Waikato Management School Page 4 199512653.xls.ms_office Fitting Bond Universe 1/2/2014