Research Of Specification Of Interest Risk Price

The market price of risk is the most important factor linking the historic measure and risk-neutral measure.The misspecification of interest risk price will result in a misextraction of the information implied in the interest term structure,this paper is the first one in China,summarizing the pros and cons of several existing specifications of interest risk price(Completely Affine Model,Essentially Affine Model,Extended Affine Model,Semi-Affine Model) under the framework of Affine DTSM,and then, basing on the three-factors CIR Model,which belongs to Affine DTSM,we make an empirical comparison on the Essentially Affine Model,Extended Affine Model and Semi-Affine Model.Through the empirical tests,we find that Extended Affine Model is the best specification of interest risk price.However,the robust test shows that three-factor CIR model combined with Extended Affine Model—the best specification of interest risk price—still can not extract all the information implied in the interest term structure.