The effect of COVID-19 in estimating the South African real spot-rate curve

Abstract

This study investigates the dynamism of different mathematical term-structure models during COVID-19 to estimate the South African real spot-rate curve. The study is based on term-structure models following Nelson-Siegel framework; and further incorporates the recalibration process on static term-structure models over different economic environments. It was found that the recalibration methodology resulted in no improvements on Linear-parametric and Cubic-splines term-structure models. However, the recalibration effect on Nelson-Siegel and Svensson models resulted in an improved fit for South African inflation-indexed spot rates even in periods of heightened market risk.

Keywords

• South African inflation-indexed bonds
• Spot-rate curve
• Model recalibration
• Nelson-Siegel model
• Covid-19