In this paper, one factor Cox-Ingersoll-Ross(CIR) and three factor semi affine square root(SAS-R) models are compared to estimate the term structure of interest rates in Korea treasury bond market. Two models are compared in fitting, forecasting and degree of factor loading. This paper also examines principal components which decide the dynamics of the term structure of interest rates.
The results are as follows: Firstly, three SAS-R model gives better results to fit current yield curve in Korean treasury market than one factor CIR model. Secondly, three factor SAS-R is superior to one factor CIR model in forecasting. But the differences of fitting and forecasting error between one factor CIR model and three factor SAS-R are a little. Finally, the state variables in one factor CIR and three factor SAS-R models well explain the dynamics of the term structure of interest rates.