Research Of Rate Term Structure Model With Structural Break And Knock-on Effect

The term structure of interest rates is a function of the bond yield on maturity at timet. How to estimate the term structure accurately is a very basic problem in the field of financial engineering. It is one standard of the financial asset pricing, risk management, hedging and speculative trading. However, the domestic studies of term structure are still in the initial stage, not yet formed a systematic research methods and conclusions. This paper intends to model and empirical analysis the interest rates term structure on the bond market in China, with statistics and time series analysis methods.Firstly, we reviewed the domestic and international research literature on the term structure model, and done a more in-depth reviews of the stochastic interest rate model and GARCH models. Next, on the basis of the interest rate level model and EGRACH model, we established a new interest rate model with the structural break and effects of information knock-on. And then, we proposed a new concept of random duration.In empirical research, we modeled and analysis quantitatively the static characteristics and dynamic changes of the bond market interest rate term structure by using Shibor interest rate and short-term bond repurchase rate. What did we do included principal component analysis (PCA) of Shibor interest rates, unit root tests of short-term interest rates, ARCH effect test of volatility and the specification tests.The empirical results show that:the level of interest rates, the lope and curvature of the yield curve can characterize the vast majority changes of the yield curve, but choosing the level of interest rates as the single factor is relative lack of ability to explain the variance. The short-term bond repurchase rate is a stationary time series, and has significant mean reversion property. The volatility of interest rate has significant ARCH effects, and the past volatility information fluctuations the new volatility. And it’s reasonable that the model have a structural break and information asymmetry.However, the goodness of the model fitting is not very satisfactory. That means a pure mathematical model does not fully reflect the laws of financial markets.In short, on the basis of the studies of domestic and foreign interest rate term structure model, we have established a new interest rate model with the structural break and effects of information knock-on, and have done the empirical analysis using the bond market data. Therefore, we have got some useful statistical conclusions that apply to the bond market in China. What we have done in this paper is instructive for the domestic research of term structure theory and the market practice.