This thesis focuses on the one-factor Heath-Jarrow-Morton model and presents empirical implementation of building-up the term structure of KTB with 10 different maturities in Korea. It also shows how to transform one-factor HJM model into two state variable Markovian model (called HJM-RS model) theoretically developed by Ritchken and Sankarasubramanian (1995) and empirically suggested by Bliss and Ritchken (1996).
The analysis results in that two state variable HJM-RS model, based on volatility structure of forward rate being exponentially declined in maturity and no constraint on spot rate volatility, outperforms one state variable HJM-GV model with constant spot rate volatility. However the results also show that the point estimates of k in the HJM-RS model depend on the choice of state variables and the stability of parameter estimated do not be obtained in the out-of-sample test. Therefore the HJM-RS model may not fully explain the evolution of the term structure of KTB in Korea, which means more complex model like a two-factor model might be more appropriate for pricing, hedging, and risk calculation for especially fixed income derivative with the medium and long maturity.
