Model Selection For The Term Structure Of Interest Rate Of Chinese Treasury Bonds

It is clearly indicated in the 19th CPC national congress' report that China should "deepening the liberalization of interest rate and exchange rate".The liberalization of interest rate in our country has been progressing for more than 20 years since 1996,and has achieved remarkable success.With the deepening of the reform,more and more experts and scholars have participated in the basic research on interest rate liberalization.As an important and basic tool for financial product's pricing,financial risk management and even the area of macroeconomic policy-making,the theory of term structure of interest rate has attracted many researchers'attention in recent years.The selection of objective function is very important when the researchers use relevant models to fit the term structure of interest rate.Different objective function leads to different algorithm used in the process of model solving,and different algorithm results in different model.More specifically,by using the same sampled data,if the objective functions used are different,those models even fitted by the same kind of model under the constraint of different objectives would also make a big difference in concrete form,fitting effect,the time of data process and the stability of model parameter.At present,there are three kinds of objective functions in the field of term structure of interest rate,which are price,yield and duration weighted average price.Therefore,this paper will focus in the superior and inferior comparing in fitting effect between six kinds of fitting methods derived by two classic parametric model Nelson-Siegel(1987)and Svensson(1994)under the constraint of three different objective functions which includes price,yield and duration weighted average price.In order to find out those main factors influencing the change of interest rates' term structure of Chinese treasury bonds,firstly,we use the method of principal component analysis to analyze the change of treasury bonds' yield in the past five years before making empirical analysis based on the above-mentioned six methods.The analysis show that the change of interest rates' term structure of treasury bonds is mainly influenced by three factors:level,slope and curvature.While,these three factors are closely related to the parameters of two types of models studied in this paper.After making a principal component analysis for Chinese treasury bonds' change in returns,this paper focuses in the empirical research on treasury bonds' data of the same period by using six methods derived by Nelson-Siegel model and Svensson model under the constraint of three different objective functions which includes price,yield and duration weighted average price.Meanwhile,a comparative analysis is made from three dimensions,including the in-sample graphics at a single point,the accuracy of out-of-sample bonds' valuation and the stability of model parameters' time series.In the point of view of graphics,taking comprehensive comparison between the overall shape,the flexibility of curve fitting,the curve's analog capability for the fluctuation trend of interest rates in the real financial market into account,on November 302017,the yield curves fitted by Svensson model under the constraint of three objective functions is better than Nelson-Siegel model's.Meanwhile,the yield curve fitted by Svensson model under the constraint of objective function of yield is the best of three;From the perspective of the accuracy of out-of-sample bonds' valuation,the yield curve fitted by Svensson model under the constraint of objective function of duration weighted average price has the best simulating effect in valuation among six methods,whether it is judged by the standard of Root Mean Squared Error,Root Mean Squared Percentage Error or R-squared;From the perspective of the stability of model parameters' time series,the model fitted under the constraint of objective function of yield is the smallest in volatility of the three,whether it is Nelson-Siegel model or Svensson model,and the fluctuation of its very view parameters is closely related with the reality.Comprehensively speaking,among these six kinds of fitting methods for interest rate curve,this paper recommends the yield curve fitted by Svensson model under the constraint of objective function of duration weighted average price to researchers for the use of financial assets' pricing.Meanwhile,the interest rate curve fitted by Svensson model under the constraint of objective function of yield is proposed to be used in the study of interest rate trend and the change of macro economy.