The Application Of Nelson - Siegel Model In The Term Structure Of China 's National Debt Interest Rate

Since the year1996, the market-based reform of interest rates has been carried forward stably. The market-based reform of interest rates turns to be the core content in the development and reformation in our country. Meanwhile, in the recent decades, the bond market in China has been developing vividly and fast, attracting wide attention. Constructing the term structure of interest rate of the national debt effectively will be quite helpful for predicting the trend of the future interest rate, establishing of monetary policy, pricing of many financial products and preventing of interest rate risk. Under this background, we did the research on treasury’s term structure of interest through Nelson-Siegel model.This article firstly introduced the background and meanings of study of the subject, and in the second chapter it discussed the theoretical knowledge and current research situation of term structure of interest rate. In the third chapter, we introduced relevant knowledge on the yield curve of the treasury and calculation method of Nelson-Siegel model, and then adopted empirical analysis on the model. We chose the fmincon functions from Matlab to realize iterative optimization. In chapter four, we predicted the three parameters of Nelson-Siegel model using AR(1) model and VAR(1)model, and then we predicted the future term structure of interest rate. Comparing to real values, we reached the conclusion that VAR(1) model is more precise on predicting parameters of Nelson-Siegel model. At last we suggested the central band to increase the types of short term treasury, complete the trade system of treasury, speed up the progress of the market-based reform of interest rates, adjust the structure of treasury’s holder, encourage financial innovation and issue permanent treasury.