Study On The Participant Behaviors In Pricing Process Of China Bond Market

Since the establishment of China inter-bank bond market in 1997, the development of China's bond market has been on a fast track. Nevertheless, as a result of regulating restrictions and lack of benchmark interest rate, the reasonable basis for bond pricing has not been formed yet. Active participant of the market generally relies on market experience to price bonds, and this subjective practice is vividly described as "patting head" in China. In consequence of this "patting head" practice, extremely large systematic risk is embedded in bond market, especially during the present low interest rate period. To more accurately price bonds, some domestic institutions brought in or worked out bond pricing models and bond yield curves. However, the unsound interest rate system, law and regulation restrictions, inactive dealings and unreliable data sample have caused a big deviation between the theoretical price predicted by model and the real dealing price, which makes these models difficult to be applied in bond pricing process.With many years' dealing experience, the author has noticed that the most decisive factor of above mentioned bond pricing deviation lies in participantors' behaviors, The author reinforces studies on operating mechanism of the market administration, main bond issuer and core market dealing participant for this mechanism has the most influential effect on bond pricing. The author has also added some of his personal understandings and thoughts to bond pricing, which helps the model to work out a better result. Therefore, the studies on participant behaviors in pricing process have strong theoretical significance and satisfy practical needs as well.On the basis of analyzing.those phenomena which lead to invalidation of bond pricing model such as "one-sided market", "noise dealing" and "price manipulation" in bond market, this paper conducts a psychological, test on active main market participant and discovers some participant behaviors which can influence bond pricing: relative cycle effect, herd effect, homogeneity effect, emotional variation, speculation, loss averse, overconfidence, under reaction, etc. It's worth mentioning that "Relative cycle effect" and "Homogeneity Effect" are brought forward and systematically studied for the first time in inter-bank bond market.In order to scrutinize above mentioned participant behaviors, the concept of "financial zoology" is introduced into this paper, and the main influential zoological elements like bond market system, market participant, and systematic environment are examined. In consequence of fast growth, the inter-bank bond market has become an essential part of China's bond market. It takes up as large as 95% of the total capacity of China's bond market and serves as the place where PBC carries out open market operation. Main market participant of inter-bank bond market includes the market administration - PBC, main issuers, main investment dealers and main intermediate service member. To satisfy the need of monetary policy adjustment, PBC conducts open market operation in inter-bank market, alters market capital amount in a timely manner according to macro economic environment and guides the changing direction of market interest rate. The primary goal of main bond issuers in bond market is to acquire funds with relatively low cost. The fundamental purpose for main investment dealers to participate in bond market is to obtain investment return or satisfy liquidity needs. Different dealing body takes on different preference and behaviors: banking member, as the absolutely dominant participant in inter-bank market, mainly conducts liquidity management and optimizes bank assets allocation, so they prefer short-term and mid-term bonds; Insurance companies mainly need to fund their insurance capital. Under the circumstance of low-cost and long-term insurance premium, they heavily invest in mid-term and long-term bonds to obtain stable interest return; Due to regulation restrictions, money market funds can only invest in short-term bonds. The above mentioned activities have caused intentional segmentation of interest rate term structure. System innovation can push forward development of bond market, nourish and alter marketilized behavior of main market participant, and finally help to build up price discovery mechanism on marketilization basis. Under the macro economic background of China's financial system transformation, inter-bank bond market is experiencing fast systematic reform, market regulations are gradually being relaxed, new products are quickly created and introduced to market, market transparency is being enhanced, and participant behavior is more marketilized. However, the depth and thickness of bond market is still lagged behind, basic accumulation of marketilization is relatively inadequate, and many regulation restrictions still exist at present. Consequently, improving financial zoology of bond market for participant is a must to increase reasonableness of participant pricing behaviors. A sound financial zoology is the premise and basis for healthy and quick growth of bond market. It also plays an essential role in facilitating bond market pricing discovery, in fully optimizing resource allocation, and in pushing forward healthy development of China's economy.Financial zoology influences pricing behaviors of participant to a great extent. Nevertheless, no matter the effect of which zoological factor is finally reflected through participant behaviors, the key of modifying pricing model is to find those fundamental factors out of many behavior factors of participant. By applying Logit model, the author conducted a pricing deviation test on 31 participant behavior factors, which include intuition judgment, relative cycle effect, homogeneity effect, issuing regulation, etc. The test is performed from two perspectives, namely bond dealing market and bond issuing market. Through this test, the author discovers three behavior factors of dealing market: the primary factor is that main investor generally relies on their intuitional judgment (not on strict model calculation); the secondary factor is homogeneity effect; the third factor is influence from colleagues around. The author also detects three behavior factors of issuing market: the primary factor is issuing rules of main issuers; the secondary factor is investment strategy maturity of participant; the third factor is relative cycle effect. Meanwhile, for both of the two market model estimations, monetary policy operation of PBC is the most direct behavior factor affecting bond pricing. Based on the above discovered main behavior factors, this paper further studies open market operation of PBC and relative cycle effect as well as homogeneity effect of main issuers and main dealers. Related policy advice is also proposed in this paper on the basis of pricing model formation.