Theories And Applications Of Dynamic Term Structure Models Of Interest Rates

The interest rates is one of the fundamental price variables in the financial markets, term structure of interest rate is the curve formed by interest rates of different maturities. Modeling the dynamic of interest rate is always one of the most important topics of finance research. The foreign academic researchers have done much research on this topic and developed so many term structure models. Domestic research on this topic began from recent years, academic researchers have not made a systematic research and there were still many arguments on some problem. Based on former theories and research, this dissertation makes some empirical research of modeling the term structure of interest rates in China and reaches some reasonable conclusions.This dissertation reviews systematically the research on term structure at first, including hypothesis of term structure formation, methods of estimating term structure, dynamic behavior of interest rate, principal component analysis of term structure, dynamic models and methods of estimating these models. In the following empirical test part, this dissertation uses the historic Treasury-bond price data of Shanghai Stock Exchange to estimate term structure and studies the dynamic behavior of interest rates in China, including the shape of term structure, main factors of dynamic change of term structure. In the last part of empirical test, this dissertation uses two different dynamic models, such as two-factors CKLS and two-factor generalized models to model the dynamic of short-term interest rate and yield curve, and gets some conclusions to explaining the dynamic behavior of term structure of China. In the end, this dissertation summarizes my research and discusses prospect of research in this topic.The innovation of the dissertation is that by conducting principal component analysis of term structure of China, I find the factors which affect the dynamic behavior of interest rates of different maturities are different, so using short, medium-term rate and long-term rate as two factors to build a two-factors model is reasonable way to modeling the dynamic of interest rates in China market.The main conclusions of this dissertation are as follows: 1. Interest rates in Chinamarket also show mean reversion and level effect, and the short-term rates have faster mean reversion speed and stronger volatility than long-term rates. 2. The factor which affects the dynamic behavior of short and medium-term rate is level, and the factors which affect the dynamic behavior of long-term rates are level and slope; 3. For modeling the dynamic of short and medium-term rates, it only need to build a one-factor model, but for long-term rates or term structure building a two-factors model is a more suitable choice.