Nelson-Siegel model
The Nelson-Siegel model is a mathematical approach used to describe the term structure of interest rates, which shows how interest rates vary with different maturities of bonds. It combines three factors: the short-term interest rate, the medium-term rate that decreases over time, and a long-term rate that reflects market expectations. This model helps investors and policymakers understand and forecast interest rates, making it easier to assess the value of bonds and manage financial portfolios. Essentially, it provides a smooth curve that relates bond yields to their time until maturity, capturing the dynamics of the bond market.
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The Nelson-Siegel Model is a mathematical approach used to describe the yield curve of interest rates, which shows how the interest rate on bonds changes with different maturities. Developed by economists Nelson and Siegel in the 1980s, it uses a specific formula to capture the curve's shape, reflecting short-term, medium-term, and long-term rates. This model helps investors and analysts understand how economic factors influence interest rates, aiding in investment decisions and risk assessment related to bonds and fixed-income securities. It’s widely used for its simplicity and effectiveness in representing yield curves.