Models And Applications Of Term Structure Of Interest Rates

The term structure of interest rates is always an important field in financial research. So-called term structure of interest rate refers to a relationship between yield of risk-less bonds and term.The research of term structure of interest rates had a progress from qualitative analysis to quantitative analysis. Qualitative theory consists of three theories: expectations hypothesis, market segmentation theory and liquidity preference hypothesis. These theories are foundation of modeling, analysis, as well as contrast, and provide a reference theory to practical application. With the extensive application of math instruments to economic analysis, especially the continuous development of technology of time series, quantitative analysis is more and more important in the domain of finance. We summarize the models into two categories: general equilibrium models and arbitrage-free models. Analyzing and comparing these two kinds of model, we obtain the advantage and disadvantage of different models and distinguish the explaining ability and applicability among different models, and offer reference to application of models.The expectations hypothesis was put forward by Irving Fisher in 1896. It offered a good starting for dealing with uncertain future. The initial expectations theory states that the expected one-period interest rate of return on an investment is the same, regardless of the maturity of the investment. Many scholars amended it through adding a liquidity premium. It makes the expectations hypothesis more practical. There is an important promise on the expectations theory that they are substitutable between long-term and short-term securities. Culbertson, Modigliani and Sutch had different...