An Estimation of Term Structure of Interest Rates in the Cambodia Banking System

Abstract

The objective of this research was to study about the term structure of interest rate by applied the four best well known models: CKLS, Merton, Vasicek, and CIR models over the 1-month US dollar lending interest rate of banks in Cambodia. The estimated method of the employed models was GMM. The CKLS result supported the mean reversion effect, but had no evidence of the level effect, while the result of the Merton model had not support even the mean reversion effect, but the diffusion parameter was highly significant. The Vasicek and CIR models had a weakly support the mean reversion effect, but the diffusion parameters were highly significant. The survey result revealed that banks faced with high level of interest rate risk because of the pressure from high level of competition due to the current existing of large numbers of market players in banking industry.

Keywords: Term structure of interest rate, CKLS, Merton, Vasicek, CIR, GMM, Survey.