COMPARATION OF VASICEK AND HULL-WHITE MODEL IN YIELD TO MATURITY DETERMINATION OF ZERO COUPON BOND IN BANK OF CANADA

• Main Author: Putra Pertama, Rangga
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/47788
• Institution: Institut Teknologi Bandung

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.