A Three-Factor Affine Term Structure Model Of Interest Rates And Its Application

The problem of the term structure of interest rates is about the relation between instantaneous rates and maturities. It plays an important role in bonds pricing, analysis and risk management. With the issuance volume of government bonds increasing in recent years, there has achieved a great deal of developments in Chinese bond markets. Then the task to establish and study the term structure of interest rates in our country becomes more and more important. In this paper, a three-factor affine term structure of interest rates has been established to analyze domestic bonds markets using data from Shanghai stock exchange. The main task is that.(1) The previous researches on the term structure of interest rates have been summarized and reviewed. It's pointed that the theory of affine term structure models of interest rates is a hot topic up to now.(2) The theories of term structure have been introduced, including static term structure and dynamic term structure. The emphasis is put on the theory of affine models.(3) Domestic static term structure has been established. B-form spline method is used, different from other methods like Nelson-Siegel method used by other scholars, because the literature shows that B-form spline method is superior to other methods.(4) Domestic dynamic term structure has been established. Using the instantaneous interest rates for one year, three years, five years, seven years and ten years computed from the static term structure above and the Kalman filter and maximum likelihood methods, a three-factor affine model of our country has been established.The results suggest that the estimated parameters from the three-factor affine model fits mostly the properties of real interest rates behavior, but greater errors exist between the estimated term structure and implied term structure.