This paper proposes SFBC MIMO-OFDM based two-way relay system to improve signal quality with keeping higher transmission efficiency. In the two-way relay system, each user terminal (U1) is required to estimate channel frequency responses (CFRs) for up and down links between both UTs and RS (Relay Station) precisely which are used in the demodulation of the other user's information data with frequency domain equalization. To satisfy the above requirement, this paper proposes a novel CFR estimation method for the SFBC MIMO OFDM based two-way relay system which can achieve better CFR estimation accuracy and better BER performance even in the higher time-varying fading channel. The salient features of proposed system are to employ the SFBC technique both for data subcarriers in the pilot symbols and data symbols and to apply the Maximum Likelihood (ML) and Cubic Spline Interpolation methods to the estimated CFR at pilot subcarriers with Walsh codes in the estimation of CFR for the frequency axis and time axis, respectively. From the computer simulation results, this paper demonstrates the effectiveness of proposed system which can achieve higher signal quality with keeping higher transmission efficiency even in the higher time-varying fading channel.