A New Method for Heteroscedasticity of Term Structure Model Using Exponential Splines

Exponential splines are introduced based on the definition of the spline bases. Exponential splines model of this paper and that of Martellini and Priaulet are proved to be the same in theory. Based on the Chinese treasury market´s characteristic and oversea methods for estimating term structure of interest rates, heteroscedasticity of term structure model of interest rates is discussed and a new method for dealing with heteroscedasticity of term structure model, namely confirming a certain bond´s size of variance according to its trading volume of the market is offered. Empirical research and comparison of this model with others are carried out using the data of Chinese treasury market. The results show that the method can significantly decrease the errors of government bond pricing. The new method is better than the foreign traditional method for dealing with heteroscedasticity of term structure model and is more suitable to our national fact.