Philippine E-Journals

Implementing the Modified Nelson-Siegel-Svennson Model in Constructing the Philippine Yield Curve

Armin Paul D. Allado | Ruel Maningas

Discipline: Finance

 

Abstract:

The main goal of this paper is to construct the Philippine yield curve using the Modified Nelson-Siegel-Svennson (NSS) model, a parametric method commonly used by economists to understand the dynamics of the yield curve. The NSS model incorporates six parameters to determine the location and magnitude of the curvature of the yield curve. Constructing the theoretical yield curve involves determining the optimal parameter values that will minimize the residual between fitted and actual yields. The model takes as input the real-time trading data for all bonds transacted on a particular date and finds a smooth curve that best fits the observed yields using the six parameters in the NSS equation. Moreover, the model can identify which bonds are undervalued or overvalued based on the best fit curve. Furthermore, the optimal parameters of the model were analyzed to understand how they affect the best fit estimation.