# Setting input parameters for Nelson Siegel Svensson model

I am trying to determine the parameters for the Nelson Siegel Svensson model and am solving a Non-Linear Optimization problem to do this.

I am trying to solve:

$$\min_\theta{\sum{(p_i - \hat p_i)^2}}.$$

where $p_i$ are the observed dirty prices of the bonds and $\hat p_i$ are the prices that have been calculated using the NSS parameters, $\theta$

I am using the procedure presented in this paper. But I've also read that the Optimization is highly sensitive to the input set of parameters ($\theta$) as mentioned in Page 2 of this paper. Hence, if I don't have data on these parameters how should I look to set the input. I am currently trying to do this for GBP Government Bonds, but am unable to find any published parameters. I was also unable to find how people circumvent this problem.

Currently, I am using the $\theta$ values presented here as I thought they may be similar for the GBP Government Bonds. However, the Optimization proves to be unsolvable.

This is part of the code that I am using in Python to solve the optimization problem. func just returns the sum of the squared difference in prices (Objective function) and params refer to $\theta$. These are the input params I am currently using.

params = [3.15698855,    -2.98240445,    -3.37586632,    -1.67713694,    0.88538977,    3.84324841] #Theta
optimize.minimize(func, params, method='COBYLA', constraints = cons, options={'disp': True})


Thank You

• Indeed, I'm not sure what this adds to your previous question @jojo. Jul 24, 2015 at 7:11
• @BobJansen There I was misunderstanding how to set-up the question. Here, I am asking for how to look for input parameters. These are completely different things.
– Jojo
Jul 24, 2015 at 11:30
• I see, I think there is still some overlap but this ca be tackled as a separate thing. Can you maybe cross reference the questions? It gives a better picture of where you are and will get you better help. Also users can then use your questions as a guide to do NSS themselves start to finish. Jul 24, 2015 at 12:13
• @BobJansen Certainly. I've edited the question. I hope it is clearer now.
– Jojo
Jul 24, 2015 at 12:31

Jojo, in practice people often start by fixing $\lambda$ then estimate the model by OLS and check the squared errors of the model. Then change $\lambda$ and repeat the procedure. This is highly efficient, and you can do it for a reasonable large range for $\lambda$. Then check which $\lambda$ yields the lowest squared errors. This should not take more than 30 seconds in a standard computer.