Term Structure Model Of Interest Rate

An arbitrage free five-factor term structure interest rate model is derived to estimate the time series of zero coupon rates with various tenors. In this affine model, interest rate is the linear combination of some latent factors, which are also referred to as state variables. By using the historical data of market rate as sample and Kalman Filter as statistical tool, we can get the time series of state variables. The coefficient matrices only depend on the tenor of interest rates, and can be obtained by using non-arbitrage asset pricing theory. Hence, the interest rate corresponding to a certain tenor at a certain time can be determined. And the calibration of model needs the combination of Kalman Filter and maximization of log-likelihood. At last, we will apply the model established in the paper to fit the yield curve, and further do some sensibility analysis and prediction of interest rate.