The Research On Bond Pricing Of Hull White Interest Rate Term Structure Model

With the steady implementation of reformation of rates liberalization in China,market interest rates rather than regulated interest rates will have a major impact onallocation of financial assets. At present, in the context of the financing difficulties ofSMEs. It is urgent for China to increase the amount of bonds issued to provide newfinancing channels for SMEs, while bringing more investment options to investors, soas to improve the function of capital market. Therefore，it is necessary to study theterm structure of interest rates and bond pricing.Firstly, the article introduces the traditional and modern term structures,andfocuses on the equilibrium interest rate model and the no-arbitrage interest rate modelin introduction of the modern term structure. Then，to the Hull-White interest ratemodel studied in this paper, we convert the short-term interest rate into the form ofanalytical solution, and determine to estimate three parameters: the instantaneousforward rate, mean reversion speed and the standard deviation of the short-terminterest rate.Before estimate the interest term structure, we compared the four estimatedmethods and use the Nelson-Siegel model to estimate the forward rate expression, andthe result is consistent with the trend of China’s bond yields, fitting well. Accordingto the recommendations of Hull-White, we use Vasicek model to estimate theparameters of the mean reversion speed and the standard deviation of interest rate.With reference to the Pan Guanzhong (2004)，we select the interest rate of the bondrepurchase R007to substitute the instantaneous rate, and then discrete the Vasicekmodel, further getting the estimated value of mean reversion speed and standarddeviation of short-term interest rate.In order to reduce the influence that risk market price to the bond pricing, we useMonte Carlo simulation method to the Hull-White model pricing. And we select sixcoupon bonds of with three consecutive days trading, getting the result that the errorbetween the forecast results and the actual price control in the range of about1.5%，sothe Hull-White model is adapted to the national bond pricing.Finally, we make a sensitivity analysis to the Hull-White pricing model，focusingprimarily on two parameters: the mean reversion speed and the standard deviation ofthe interest rate. The result is that the volatility of pricing result caused by the reduction of the mean reversion speed and the increasing of the standard deviation ismuch greater than that the two parameters change in the opposite direction.