Empirical And Application Research On Factor Decomposition Of Spot Yield Curve

This article first verify:The three factors we get by using FA (Factor Analysis) can explain most changes of the Spot yield curve of Chinese fixed rate government bonds. And then, based on factor decomposition of spot yield curve, I presents a hedging model and a three factors forward rate model.The main contents in the paper are as follows:(1) Empirical TestBased on 877 sets of data during 889 sequential trading days, using software SPSS13, application of factor analysis on the spot yield curves of Chinese fixed-rate government bonds. The main result is:Three factors can explain 99.625% of the total variance, combined with the shape of the load factors, it's can't denied that three factor model and the factors'explanation also applicable to the spot yield curve of Chinese fixed-rate government bond.(2) HedgingWith respect to the problem-How to map the change on the yields to the change on the factors? Built on the basis of the yield curve factor model, this article gives a more realistic way than the one of literature[1], and then construct a appropriate hedge strategy. Although more realistic, but increase the difficulty of constructing hedging strategies.(3) Term Structure ModelsHow many uncertain sources do we need in stochastic interest rate term struc-ture models? The traditional classic stochastic interest rate term structure models are based on assumptions about the number of uncertain sources and their struc-ture, which are never answered the question according to the movements of yield curve. Robert R.Bliss in literature[2] have been mentioned:Based on the factor analysis of the interest term structure, number of factors will enlighten this prob-lem. I make FA on the spot yield curve of Chinese fixed Rate government bonds, specifically gives a three-factor forward interest rate model, and give its Market non-arbitrage condition, Market completeness conditions, replication strategy. In general, like many other classic interest rate non-arbitrage models, this model can be attributed to the theoretical framework of arbitrage-free.