Nonparametric Two Factor Term Structure Model And Pricing Of Interest Rate Derivative

In this paper, we employ two-factor Nonparametric Term Structure Model to analyze the Chinese interest rate term structure. With the rapid development of Chinese Bond market and marketization of the interest rate, an increasing number of researches on interest rate term structure have been carried out during the last several years. Most of researches applied the term structure model in a standard fashion, using single factor model and parametric estimation. However, it has reported that multi-factor model would have better performance in describing the interest rate term structure. Meanwhile, the traditional parametric estimation has been proved to make too strong restriction on the form of diffusion function, which might lead to biased estimation. Therefore, we apply a Two-Factor Term Structure Model and take the spread and long term rate into account. Besides, we employ a nonparametric method to estimate the stochastic differential equation without making any assumption on the function form. We also use Monte Carlo simulation and this Nonparametric Two Factor Term Structure Model to price Treasury bill in China, and we hope this it could be help in pricing our interest rate derivatives.