In the Nelson-Siegel framework, which of the following statements is valid? Let the notation used to describe the fitting function be the following: $A ( t ) = a + b e ^ { - t / d } + c ( t / d ) e ^ { - t / d }$
A) $\alpha$ determines the slope.
B) $b$ determines the location of the hump.
C) $C$ determines the hump shape.
D) $d$ determines the long-term rate.

Question

Quizplus · Accepted Answer

In the Nelson-Siegel framework, the parameter $c$ (not $C$, but assuming a typographical error) influences the curvature or the hump shape of the yield curve. The parameters $a$, $b$, and $d$ have different roles: $a$ affects the long-term level of the curve, $b$ influences the short-term rates, and $d$ affects the speed at which the curve approaches its long-term level, not directly the location of the hump or the long-term rate as the options might suggest.

In the Nelson-Siegel Framework, Which of the Following Statements Is A(t)=a+be−t/d+c(t/d)e−t/dA ( t ) = a + b e ^ { - t / d } + c ( t / d ) e ^ { - t / d }A(t)=a+be−t/d+c(t/d)e−t/d

In the Nelson-Siegel Framework, Which of the Following Statements Is $A ( t ) = a + b e ^ { - t / d } + c ( t / d ) e ^ { - t / d }$