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Empirical Study on the Yields of Treasury Bonds in the Shanghai Stock Exchange by a Three-Factor Affine Term Structure Model

Author: QinDaPeng
Tutor: WenZhongQiao
School: Anhui University of Finance
Course: Finance
Keywords: term structure of interest rates three-factor affine model Kalman filter
CLC: F832.5
Type: Master's thesis
Year: 2013
Downloads: 33
Quote: 0
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The term structure of interest rates is about relationship between maturity yield of treasury bonds and maturities, it reflects the influence of the time factor on interest rates. It lays the foundation for asset pricing, risk management and hedging, it also serves as an effective analysis tool for the central bank to make monetary policy and exercise macro-control, so it plays an important role in financial system. With the development of China’s socialist market economy, the progress of the interest rate market, the expansion of the national debt scale and impact of the international financial risk to our financial markets, the research on term structure of interest rate becomes increasingly important.This paper first introduces the research background and the significance of the term structure of interest rate. Then we make a brief introduce of research actuality and theories on the term structure of interest rate. This paper constructs a three-factor affine term structure model to evaluate the performance of fitting treasury bonds yield in Shanghai Stock Exchange. In order to estimate model parameters, we use Nelson-Siegel model to acquire spot rates. Through correlation analysis, we find that the dynamic changes of the interest rates could not be described by the Single factor dynamic model. Nevertheless, the dynamic changes can be well explained by three-factor model through factor analysis.Based on spot rates data, we utilize Kalman filters to estimate model parameters, then compare predicted value and adjusted value to actual value separately, we find that the result of1-year and2-year spot rates are not well fitted while the longer term spot rates are more accurate. As the whole, three factor affine term structure model can describe the dynamic changes of treasury bonds in Shanghai Stock Exchange.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial market
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