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Term Structure Fitting Models and Information Content: An Empirical Examination in Taiwanese Government Bond Market

Author

Listed:
  • Shih-Kuo Yeh

    (Department of Finance, National Chun Hsing University, 250 Kuo-Kuang Road, Taichung 402, Taiwan, ROC)

  • Bing-Huei Lin

    (Department of Business Administration, National Taiwan University of Science and Technology, No. 43, Section 4, Keelung Road, Taipei 106, Taiwan, ROC)

Abstract

In this study, we apply empirical methodologies, which are essentially curve fitting techniques, and use cross-sectional bond price data to estimate and analyze the Taiwanese government bond (TGB) term structure of interest rates. We choose two economic models: the Vasicek model and the CIR model, and one mathematical model: the B-spline approximation function, as the discount bond function to extract the term structure from market coupon bond prices. To assess the fitting performances and investigate the economic information content of the term structure fitting models, we compare the estimation errors and examine whether trading mis-priced bonds according the fitting model, can provide excess returns. The hypothesis is that the mathematical model can fit the term structure better than the economic models. But the economic models, which contain economic information, are able to explain the term structure dynamics. Thus the economic models can perform better in identifying mis-priced bonds and in predicting excess trading returns, than the mathematical model. Using the methodologies in this study, we can investigate the term structure fitting problems and look at the economic information content of the term structure fitting models.

Suggested Citation

  • Shih-Kuo Yeh & Bing-Huei Lin, 2003. "Term Structure Fitting Models and Information Content: An Empirical Examination in Taiwanese Government Bond Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 305-348.
    • Handle: RePEc:wsi:rpbfmp:v:06:y:2003:i:03:n:s0219091503001110
    DOI: 10.1142/S0219091503001110
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    References listed on IDEAS

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    1. Mark Deacon & Andrew Derry, 1994. "Estimating the Term Structure of Interest Rates," Bank of England working papers 24, Bank of England.
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    Cited by:

    1. Januj Juneja, 2018. "Empirical performance of Gaussian affine dynamic term structure models in the presence of autocorrelation misspecification bias," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 695-715, April.
    2. Januj Juneja, 2015. "An evaluation of alternative methods used in the estimation of Gaussian term structure models," Review of Quantitative Finance and Accounting, Springer, vol. 44(1), pages 1-24, January.
    3. Ren-Raw Chen & Shih-Kuo Yeh, 2012. "Analytical bounds for Treasury bond futures prices," Review of Quantitative Finance and Accounting, Springer, vol. 39(2), pages 209-239, August.

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    More about this item

    Keywords

    Term structure of interest rates; B-spline approximation; diffusion process; mean-reversion;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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