Applying Yield Curve Fitting Models to Construct Trading Strategies of Bonds---Empirical Study in Taiwan Government Bond Market

• Main Authors: Yun-Ju Chen, 陳韻如
• Other Authors: 林蒼祥
• Format: Others
• Language: zh-TW
• Published: 2007
• Online Access: http://ndltd.ncl.edu.tw/handle/3e7xyx

碩士 === 淡江大學 === 財務金融學系碩士班 === 95 === The term structure of interest rates is an important input for basically every pricing model and is mostly calibrated on coupon bond prices. Therefore the estimated interest rates should accurately explain the market prices of these bonds. However nearly all empirical papers on interest rate estimation, e.g. Svensson(1994), report significant pricing errors in their sample. So an important question is what drives these pricing errors of the bonds. One simple explanation would be different tax treatment or different liquidity but most papers on this research topic, e.g. Elton and Green(1998), cannot fully explain the observed pricing errors. Therefore these errors must be at least partially caused by either model misspecification or by the mispricing of particular bond prices from general market conditions. We employ Nelson-Siegel-Svensson model by Svensson(1994) and liquidity weighted method by Subramanian(2001) to estimate the term structure of interest rates for the Taiwan government bond market for the time period January 2003 to December 2006. We present the resulting pricing errors and the trading strategies based on these pricing errors. The trading signals are received by using the moving average method and by calibrating time series models to the pricing errors which allows us to trade against observed mispricing. Empirical results can yield abnormal return compared to buy-and-hold strategies. Pricing errors seem to contain some economic information and are not exclusively caused by model misspecification or differences in liquidity of individual bonds.