Modelling the term structure of interest rates in Kenya

Abstract

Understanding the term structure of interest rates is a key area in the current global environment especially in pricing of financial instruments, debt management and monetary policy decisions. Several studies have been done in the developed economies like US, Britain and Canada. This study uses Kenyan interbank rate which is influenced by the Central Bank of Kenya rates to estimate Vasicek (1977) model parameters. The parameters of the model is used to simulate short rates as well as the future yield and compared with the market data. Finally the study uses Vasicek model to calculate value at risk which is an accepted market risk measure, using Monte Carlo simulation