COMPARATION OF VASICEK AND HULL-WHITE MODEL IN YIELD TO MATURITY DETERMINATION OF ZERO COUPON BOND IN BANK OF CANADA
Zero Coupon Bond is an example of bond sold with price cheaper than it’s par value. The choice to sell the bond at a discount effected by interest rate level so it is important to model interest rate level movement over time and see the relation towards Zero Coupon Bond price and yield to maturit...
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| Format: | Final Project |
| Language: | Indonesia |
| Online Access: | https://digilib.itb.ac.id/gdl/view/47788 |
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| Institution: | Institut Teknologi Bandung |
| Language: | Indonesia |
| Summary: | Zero Coupon Bond is an example of bond sold with price cheaper than it’s par
value. The choice to sell the bond at a discount effected by interest rate level
so it is important to model interest rate level movement over time and see the
relation towards Zero Coupon Bond price and yield to maturity. The interest rate
level movement chosen is the Vasicek model and the Hull-White model (extended
Vasicek) where the difference of the two models is the constant value of parameter
in the Vasicek model and the parameter as a function of time in the Hull-White
model. Furthermore, Lemma Ito will be used to see the relation of Zero Coupon
Bond price change to change in the interest rate level based on the Vasicek model
and the Hull-White model overtime so the equation of price and yield to maturity
of Zero Coupon Bond in a certain time will be obtained. Root Mean Squared Error
will be used to compare the accuracy of yield to maturity calculation based on the
Vasicek model and the Hull-White model.
In addition to comparing the accuracy of yield to maturity calculations, the probability
of a negative interest rate level is also taken into account because a negative
reference rate is not expected to occur. This calculation Uses the cumulative distribution
function of the interest rate level that is normally distributed.
The data that used to calibrate the parameters in two models is yield to maturity of
Zero Coupon Bond and government bond data from the Bank of Canada. It is found
that the Vasicek model is better at estimating yield to maturity for a short determination
time while the Hull-White model is better at estimating yield to maturity for a
long determination time. Meanwhile, the probability of a negative reference interest
rate based on the Vasicek and Hull-White model is so small that the difference
between the two is not significant. |
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