The Study On Dynamic Term Structure Of Treasury Bond Based On A Two Differential Factor Model

Interest rate term structure owns abundant economic meaning, it can be used to predict the economic trends in the future, the level of inflation. It also plays an important role in asset pricing and risk management. And it can provide important reference for the implementation of monetary policy for central bank, So the term structure of interest rates has attracted more and more attention.In this paper, the economic growth rate, inflation rate, currency growth rate are incorporated into the stochastic differential equation to construct a two differential factor model of interest rate term structure, and then we used this model to price treasury bonds, and got good results for short term bonds, but it could not get good result for medium-term bonds and long term bonds. It indicated that macroeconomic factors have a significant effect on the term structure of interest rate, in the study of term structure of interest rate, the role of macroeconomic factors couldn’t not be ignored.This paper can be divided into five chapters:The first chapter of this paper is an introduction, it mainly gives the background and significance of this paper, it also gives the framework of this paper and points out this paper’s innovation and deficiencies.The second chapter is mainly about the literature review, the relevant literature of the dynamic interest rate term structure model is introduced, including the equilibrium model and no arbitrage model, the new progress of dynamic model of the term structure of interest rate, and some empirical papers on the relationship between the interest rate term structure and the macro- economy.The third chapter is mainly about to construct dynamic interest rate term structure model for this paper. Firstly, the relevant contents of the transaction equation and Fisher effect are used to as the mathematical logic for this model. Secondly, this paperconstructs the macro economic basis for the model, including theoretical analysis, and the empirical test. The empirical test is based on co-integration theory and the VAR model. It confirms that there exists cointegration relationship between the interest rate and the two differential factors. In addition, the change of two differential factors can Granger cause the change of interest rate, so it provides the macro-economic basis for the model, but the change of interest rate can not Granger cause the change of the two differential factors.The fourth chapter introduces the method of Markov Chain Monte Carlo(MCMC),then use this method to estimate the parameters of the model of this paper,meanwhile,the meaning of the relevant parameters are analysed.The fifth chapter is mainly about to use this model for bond pricing, it have achieved good pricing effect for short-term bonds, but the result of long-term bonds is too large.The last part is the conclusion of this paper, and it also proposes some countermeasures and suggestions for dealing with the problems of the market of treasury bond.