Yield curve models within the Nelson and Siegel (hereafter NS) class have proven very popular in finance and macrofinance, but they lack a theoretical foundation. In this article, I show how the Level, Slope, and Curvature components common to all NS models arise explicitly from low-order Taylor...

Yield curve models within the popular Nelson and Siegel (hereafter NS) class are shown to arise from a formal low-order Taylor approximation to the generic Gaussian affine term structure model. That theoretical foundation provides an assurance that NS models correspond to a well-accepted...