The yield curve derived from government bonds traded in the capital market is a
major tool for asset pricing and for economic analyses, including the derivation of
investors’ expectations regarding the development of key macroeconomic variables.
This paper focuses on the estimation of the nominal and CPI-indexed government
bond yield curves using the Nelson-Siegel-Svensson parametric method. The paper
presents an examination of the constraints which allow an estimation of a stable curve
that fits well with market prices, and proposes a statistical method for choosing
between an estimation using the Nelson-Siegel method or using the extension of that
model, developed by Svensson. In addition, the advantages and disadvantages of the
Nelson-Siegel-Svensson model are examined relative to the nonparametric estimation.
It appears that, in line with the theory, estimation using a nonparametric method
allows better fitting to market prices and yields, while using the parametric method
provides better “out of sample” results and is thus less sensitive to outliers.