Study Of Interest Rate Risk Of Bond Investments

SummaryIn these years, Interest-Rate Risk has become the crucial risk Chinese bond investors confront. Hence, this thesis devoted to Interest-Rate Risk's research will reveal its theoretical and pragmatic contribution.Based on a systematic research of Interest-Rate Risk's cause, measurement and control, the thesis tries to clarify its influence to Chinese bond investment's interest risks.Firstly, the thesis analyzes Chinese bond market's development history and its status quo. It confines bond investment's Interest-Rate Risk with Risk Theory, pointing out the causes of Interest-Rate Risk in China, including macro economy, monetary policy, market interest ratio, option, etc.The measurement of the bond investment's Interest-Rate Risk resulted from the quoted causes is the focus of this thesis. To accomplish this, the body is divided into three parts.1\ Previewing the VEC model's shortage in measuring indeterminate variables' infection, research here adds prolepsis variables to improve the VEC model. Making use of such methodologies like the improved VEC-CPIF model, Impulse responses, Variance decomposition, the thesis measures the Interest-Rate Risk in Chinese bourse's and banks' market, caused by macro economy, monetary policy, Market interest ratio. With the demonstration, the thesis finds that, the improved VEC-CPIF model which added CPI prolepsis is better off in measuring Interest-Rate Risk caused by factors like macro economy, monetary policy, market interest ratio in the Chinese bond market. The influence of the different variables might have different impact on Interest-Rate Risks. The factor of macro economy contributes most, while monetary policy and market interest follows. The same variable might cause different Interest-Rate Risks in bourse's and banks' market.2\ Considering AR-GARCH model's shortage in measuring multiple variables, the research adds multiple variables to improve it. With case study and improved R007-GARCH model, the thesis looks into the influence on bourse and bond markets resulted from the change of banks 'base rate and required reserves ratio, and happening. Through demonstration, the improved R007-GARCH model can better describe the fluctuation of Chinese bond market's income in these years. The influence varies, and the same event might have different impact on Interest-Rate Risks in bourse's and banks' market. Macro economy background, index and the related policy may decide how a particular event will bring Interest-Rate Risk. Understanding this do good to both policy maker and the investors.3\ To measure the Interest-Rate Risk of bond investment option, the thesis demonstrates cases with option Black-Scholes model, binary tree and OAS option adjust spread. It discovers that OAS model is a better method. However, researching with OAS model also exposes the model's limits. For example, price distortion and deficient bond rates'yield curve will affect the model's accuracy. Anyway, these should be avoided in operation.At last, basing on the measurement of Interest-Rate Risks, with angles borrowed from finaneial innovation, human resource management and immunization strategies, the thesis discusses the control of bond investment's Interest-Rate Risks. And the thesis concludes that, progress of financial innovation comes from the acknowledge of its subject, environment, and methodology. The application of TPP model in bond investment's human resource management needs to strengthen the training and valuing of bond investment talents. Considering the Perhaps Immunization Strategy'shortage of frequently changing, transaction cost increasing and passive operation, the research adds investors'risk preference to demonstrate that, the improved model can help reduce transaction cost.