Testing Term Structure Estimation Models: Evidence from Taiwan's Government Bonds Market

Jian-Hsin Chou, Hong-Fwu Yu and Hwu Der-Rong
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Jian-Hsin Chou: Department of Risk Management and Insurance, National Kaohsiung First University of Science and Technology, Taiwan
Hong-Fwu Yu: Department of Industrial Management, National Formosa University, Taiwan
Hwu Der-Rong: Corporate Banking Marketing Department, Far Eastern International Bank, Taiwan

Journal of Economics and Management, 2008, vol. 4, issue 1, 35-63

Abstract: There are many estimation models for fitting the term structure of interest rates. In Taiwan, the B-spline and Nelson and Siegel model (1987) are generally accepted with satisfactory fitting performance. However, there are still no empirical results for applying the exponential B-spline model, Diament model (1993), or Mansi and Phillips model (2001) to estimate the term structure of Taiwan government bonds. In this paper, we compare the fitting performance of these five models. The empirical results are as follows. (1) Considering different bond maturities and specifying the appropriate parameters and knots can improve performance of the exponential B-spline model. (2) After taking illiquidity constraints into account, all models exhibit improved performance. The mean R-squared of all models is at least 92%. (3) Comparing the fitting accuracy index, the exponential B-spline model performs best, followed by the B-spline model, and the Diament model performs worst. However, the smoothness measurement index indicates that the Diament model is best, followed by the B-spline model, and the Mansi and Philips and the Nelson and Siegel models perform worst.

Keywords: term structure of interest rates; exponential B-spline model; Diament model; Mansi and Phillips model (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2008
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