An Empirical Examination Of Rmb Interest Rate Swaps Pricing And Relevant Analysis

All financial transactions are faced with interest rate risk. The interest rate derivative products provide control and management tools for interest rate risk, and interest rate derivatives market has the largest trading volume and is the most active among world's derivatives market. In recent years, RMB interest rate derivatives market is developing rapidly, reflecting the interest rate risk management there is strong demanded. With the reform on RMB interest rate deepened and interest rate risk emerging gradually, the study on RMB interest rate derivatives is very urgent and necessary.Interest rate swaps are leading products in interest rate derivatives, whether in world market or in domestic market. Since RMB interest rate swap transactions were permitted in February 2006, their trading volume has been increasing rapidly. RMB interest rate swaps have become a group of major interest rate derivatives, and play a crucial role in hedging interest rate risk, enriching investment portfolio, grasping market expectations, and improving yields for financial institutions. So many practicers focus their eyes on them. In this paper, we focus our attention on the RMB interest rate swaps whose benchmark is SHIBOR, and carry out an empirical study on pricing of the interest rate swaps, sampling period being from August 14, 2007 to March 3, 2009.First, we review the literature on interest rate derivatives pricing and pricing of interest rate swaps. On the basis of it relevant interest rate swap pricing theories are described in detail, including risk-neutral pricing theory, STAR model and affine interest rate models and so on. Then, we introduce briefly the developing background, present situation and existing problems of RMB interest rate swap market in China in order that the situation of RMB interest rate swap market in China could be understood.Swap spread is the most important determinant of interest rate swap. Interest rate swap is generally quoted by way of swap spread in international markets. Because of this, the determinants of RMB interest rate swap spreads are analysed empirically. Considering the determinants have different impacts on interest rate swap spreads in different mechanisms, STVAR models are applied. After the models are estimated, generalized impulse response functions based on Bootstrap method have been applied to analyze the impacts of the determinants on the swap spreads.As there exist credit risks in RMB interest rate swaps, we have to construct a pricing Model with the risks included. In this paper we apply the generalized two-factor Gaussian affine model to model the prices for RMB interest rate swaps. And Maximum Likelihood Estimation method is used while estimating the parameters in the model.According to this paper, liquidity risks and default risks are included in RMB interest rate swap spreads. In order to quantify these risks, we apply three-factor generalized Gaussian affine model, and jointly model the RMB Treasury, repo and swap term structures. The parameters are estimated using Maximum Likelihood Estimation methods, and at last the term structures of liquidity risk premia and default risk premia are obtained.According to our research, some most important conclusions are drawn as follows. First of all, it is realized that RMB interest rate swap market in China has a long way to go in comparison with foreign interest rate swap markets, but recently RMB interest rate swap market has been developing rapidly. Secondly, within the sample period it is confirmed that there exist two distinct mechanisms. Under different mechanisms, the same determinants have different impacts on interest rate swaps. Finally, in the current pricing process on RMB interest rate swaps, they can be priced with Repo rates as the benchmark plus credit risk premia if applying swap spread method. And the liquidity factor is relatively more important than the default factor, and the market gives the liquidity risk a significant risk premium.To sum up, this thesis is an exploratory study on RMB interest rate swap pricing. In the course of the study we always insist on linking advanced financial theory with the actual conditions of China's financial market, hoping that the thesis can provide a useful reference for scholars and practicers.