Rates trading strategies based on predictions of Nelson-Siegel parameter changes: Evidence in the Korean swap market

Abstract

This thesis explores the application of butterfly strategies in the Korean Interest Rate Swaps (IRS) market, based on the predicted changes in the Nelson-Siegel model parameters, and evaluates their performance. The predictions are derived from historical values of the Nelson-Siegel parameters and economically relevant variables, which guide the execution of trades. The model that integrates economically motivated variables and exposes to the parameter $\beta _1$, representing the yield curve's slope, exhibited the most promising performance from both statistical and economic perspectives.