Fitting the term structure of interest rates in illiquid market: Taiwan experience

[[abstract]]This paper aims to compare the fitting performance of term structure estimation for Taiwan Government Bonds market,which is considered as an illiquid bond market with a low trading volume, based on the Nelson and Siegel, Extended Nelson-Siegel Model and Nelson-Siegel-Svensson Model (see Nelson and Sigel, 1987; Bliss, 1996; Svensson, 1994). The empirical results indicate that the fitting performance in accuracy for Nelson-Siegel-Svensson Model is better than that of Extended Nelson-Siegel Model, and the Extended Nelson-Siegel Model is better than that of Nelson-Siegel Model. It means that adding more parameters will obtain a better capability in describing the shape of the term structure. Also, compared with the case of which the liquidity constraint is not taken into consideration, these three models will have a better fitting performance if the liquidity constraint is considered