An Empirical Study On Active Investment Strategies Of Treasury Bonds Based On Nelson-Siegel Model

China’s bond market has achieved great development in 2013. Total size of the transaction, total amount of RMB bonds issued throughout the year have earned great growth, which reached Y 262.7 trillion and ￥9 trillion, with year-on-year growth of 3.85% and 12.5% respectively. In addition, financial needs of our residents are growing rapidly. According to the financial data of CNBENEFIT, there were 56,827 bank financial products, which amount to Y56.43 trillion, with an increase of 85.87% in 2013. According to Individual Investors Survey Report of the Shenzhen Stock. Exchange in 2013, investors hold an average of 4.49 kinds of financial products, with an increase of 6.65%. The rapid development of bond market and the great increase in residents’financial needs create enormous investment demand of bonds. Those less risky financial products, which have specified maturities and stable cash flow, are fit for ordinary investors with risk aversion.In this paper, we research on bond yield curve model and propose a more comprehensive investment strategy. We use Nelson-Siegel model to study the structure of yield curve. This paper discusses changes of/ β0,β1,β2and β4(β0+β1) and empirically analyses three investment strategies based on β1 andβ2.The results show that β0, β1,β2 and β4(β0+β1) have specific economics meaning. The Principal Component Analysis shows that β0,β1 and β2 corresponds to level factor, slope factor and curvature factor respectively, which describes the change of the yield curve. The three investment strategies based on β1 and β2 could obtain better excess return after considering the change of level factor. In the research of dynamic Nelson-Siegel model, the results show that this model could predict yield curve in 1 to 3 months, especially in terms of yield curve’s level change, which makes supplement to the above investment strategies. Based on the economic expectations in the market, investors can reduce their investment risk and increase the excess return, if using dynamic Nelson-Siegel model and choosing the appropriate investment strategies above.