Empirical Research On Term Structure Of Interest Rates Based On Least Absolute Deviations Criterion

The term structure of interest rates of government bonds is the relationshipbetween maturity duration and rate of return which have the same risk factors. At thepresent stage, research on this issue has great significance for the development ofChina’s financial markets: First, it is an important mean for forecasting interest ratechanges; Second, the interest rate of government bonds represents the risk-freeinterest rate, plus the appropriate risk premium, it can be used for pricing, and riskhedging for various of financial products within a certain error range. However,limited to the development of China’s bond market, compared with the mature debtmarket in Europe and the United States, China’s bond market in the following areassuch as the varieties of bond trading, the term structure, the overall market liquidity,and the credit rating system are need to be improved; And, due to historical reasons,China’s bond market is temporarily divided into two parts which are the exchangebond market and the inter-bank bond market, and subsequently all these factors havehindered the formation and development of China’s Interest Rate Term Structure.At this stage, the research on the term structure of interest rates for governmentbonds in theoretical circles, are more generally to use Multi-Spline Function to fitthe curve, and to use the Least Squares Method to test the parameters. Meanwhile, asthe inter-bank bond market’s transaction data is more difficult to obtain, most studiesare based on the exchange market as the research object. But, it also brings somedisadvantages: first, due to the presence of outliers, the Least Squares Method tendsto enlarge the anomaly, thus, causing the offset of the fitted curve. For these reasons,this paper adopts the Spline Function Model to fit the curve, second, in China’s twobond markets, not only the inter-bank bond market’s trading scale, bond products,but also the diversification of the transaction entities, are much larger than theexchange bond market, so, select the exchange market as the research object isunderrepresented.For these reasons, this article decided to select the inter-bank bond market asthe object of empirical research, and use Polynomial spline function model to fit thecurve, then using the least squares method and the LAD criterion to a comparativestudy, in order to get some useful results. Based on all this, we pointing out that theCubic Polynomial Spline Function Model fits China’s market better, also moresuitable for the present stage of the bond market in our country; And, in the context of the relevance of the theoretical price of the real price, the LAD criterion issuperior to the least squares method, in addition, in the fitting results on the smooth,relative to the least squares method, the LAD criterion’s residuals changes alsogentle. So, compared to the Least Squares method, the LAD criterion can effectivelyreduce the impact of the abnormal points, enhance the robustness of the estimated,and improve the accuracy of the fitting of the term structure of interest rates; At last,according to empirical results and environment of China’s economic development,we give some suggestion on fiscal policy to perfect our term structure of interest rate:speeding up the process of marketization of interest rates, and strengthening theposition of the Treasury bill rate; Improving the term structure of treasury bonds;Restoring the bond futures, increasing the launch of derivatives; Harmonization ofbond market. By all these methods then we can improve the term structure of interestrates of our country.