Arbitrage-Free Nelson-Siegel Model for Multiple Yield Curves

We propose an affine term structure model that allows for tenor-dependence of yield curves andthus for different risk categories in interbank rates, an important feature of post-crisis interestrate markets. The model has a Nelson-Siegel factor loading structure and thus economicallywell interpretable parameters. We show that the model is tractable in terms of estimation andprovides good in-sample fit and out-of-sample forecasting performance. The proposed model isarbitrage-free across maturities and tenors, and thus perfectly suited for risk management andpricing purposes. We apply our framework to the pricing of caplets in order to illustrate itspractical applicability and its suitability for stress testing