Analysis Of Term Structure-Base On Extended CIR Model

The interest rate term structure is the curve formed by interest rates of the same risk and liquidity, but the different maturities at any point. It is the benchmark for asset pricing, financial product design, hedging, risk management and so on. The study of interest rate term structure can be separated into two parts: static state and dynamic state. The research of the dynamic state which has more application value is base on the result of the static state. In this dissertation, we use the Svensson model to study the static state of the interest rate term structure of the government bond in the Shanghai Security Exchange Market (SSE). Then we extend the two factor CIR model to explore for the method which suit to reflect the real interest rate term structure in China.The main study work of this dissertation is the followings:At first, we expatiate on the background of this dissertation: China is on the process of the interest rate liberalization. We discuss about the theory and application significance of the study on the interest rate term structure. Followed we review systematically the research process on the term structure, and emphasis on the famous CIR model which is very important. Then we discuss the theory about the term structure, including hypothesis of interest rate term structure formation, the Nelson-Siegel model and the Svensson model to estimate the interest rate term structure and the two factor CIR model and its extended form which used to analysis the dynamic term structure. Base on the state space representation of the two dynamic models, we expatiate how to use the Kalman Filter to estimate the parameters. In the following empirical test part, we construct a static interest rate term structure used the Svensson model base on the SSE's trading data on 08/05/2007. Then repeat thus process, we constructs a yearly interest rate term structure from 01/09/2006 to 31/08/2007. Base on the parameters estimated by the Kalman Filter method, we use the two factor CIR model and its extend form to fit the time series data of the China government bond interest rate term structure. We find out the two factor CIR model can basically reflect the change of Chinese interest rate term structure, while its extend form is more suitable in application.