Swedish Bonds Term Structure Modeling with the Nelson Siegel Model

The purpose of this thesis is to study and model the term structure of Swedish government bonds. The emergence of the bonds market in Swedish is described and a brief introduction to interest rate theory given. For completeness, linear and dynamic time series models including state space representation and the Kalman filter are also described. The term structure of Swedish government bonds is model by using the dynamic representation of the three-factor Nelson Siegel model (1997), that was proposed by Diebold and Li (2006). The Diebold and Li (2006) two-step approach of the three-factor model, where the decay parameter is fixed to a specific value and ordinary least squares used to estimate the model coefficients, which in turn are model by a time series model to obtain their dynamics, was applied to Swedish government bonds. The results obtained shows that this approach model and fit well the yields on Swedish government bonds