Research On The Applicability Of Expectation Theory In The Term Structure Of Interest Rate In Chinese Bond Market

Expectations have played an important role in the national economy operation,and the term structure of interest rates has attracted great attention of macro-economic and financial research fields,meanwhile,the interest rate marketization of inter-bank bond market is continuously playing an important role during China’s interest rate marketization process.Since 1998,the open market operation,relying on the inter-bank bond market in China,has greatly developed and become one of the most important tools among normal operations in the central bank’s monetary policy,and the monetary policy transmission channels are becoming increasingly smoother,the sensitivity of the market participants to monetary policy signals has improved,thus creating a good condition for the formation of the yield curve and long-term interest rates,and facilitating the transition of monetary policy in our country.This paper starts with the research on the expectation theory and the term structure of interest rates,and focuses on the relationship between expectation and the term structure of interest rates,as well as the applicability of expectation theory in economic factors and regulation policy factors.The research has certain theoretical value and practical significance: during the transition from quantitative-guided to price-guided monetary policy,monetary authorities have to improve the central bank communication,strengthen public expectations and form reasonable guide for public expectations,thus to ensure the effectiveness of macro-economic policies and the micro market price mechanism.The paper mainly includes the following contents:Chapter 1 is the introduction,which includes the background and significance of the research,thread and structure of the thesis,research contents and methods,as well as possible innovation and shortages of the study.Chapter 2 is an overview of literature work and related theory.The paper starts with the literature review of three major hypotheses,namely the expectation hypothesis,market segmentation hypothesis,liquidity preference theory,and models of term structure of interest rates;then,the paper continues introduction of empirical research on expectation theory at home and abroad,as well as the predictive function of term structure of interest rates about the macro-economic variables,and reviews the development of expectation theory from static expectation to adaptive expectation,and to rational expectation;next,the paper respectively introduces the theoretical hypotheses and verification of the term structure of interest rates,namely the hypotheses are expectation hypothesis,liquidity preference hypothesis and market segmentation hypothesis,as the models include static models and dynamic models.Chapter 3 is the evolution of monetary system in the west and transition of China’s monetary policy,in specific they include: the evolution of monetary system in western countries;the transition from quantitative-guided monetary policy to price-guided monetary policy in China;the ultimate goal and intermediate target of monetary policy,the improvement of the monetary policy tools,and the change of monetary policy regulation in China.Chapter 4 is the applicability research on expectation theory in the term structure of interest rates of treasury bonds in China.Under the rational expectation hypothesis and no-arbitrage condition,the paper calculates the forward rate according to the spot rates on the yield curve,and figures out the predictive error of the indicators,to analyze the forecasting effect of forward rate for the future spot rate.First,the results show that the forecasting effect of term structure of interest rate for forward rate has certain inverse relationship with the time span of prediction,that is,the smaller the predicted time span is,the better the prediction result is,and vice verse.In addition,the paper finds that since the 2008 global financial crisis,the change of China’s regulatory policy and the fluctuation of prediction error index are in well-fitting state,by establishment of regression model and the empirical results,the paper finds that in addition to the economic-related indicators,there are other factors affecting the spot interest rate,and the disturbing factor comes from regulation policy changes.Based on the above findings,the paper comes to the conclusion: rational expectation hypothesis in economic-related prediction is applicable;however,in the forecast of other factors such as regulation policy,the rational expectation hypothesis is rejected.Chapter 5 is about the applicability of the regulatory policy in adaptive expectation theory.The study further finds that,as time is approaching,the prediction quality of the spot rate on yield curve for the forward rate is getting better and better,and the convergence rate of the prediction error is increasingly speeding up.The results show that,from the perspective of regulation policy,it is not applicable to the theoretical assumption of reasonable expectations,yet applicable to the theoretical assumption of adaptive expectations.Chapter 6 is the conclusion and related suggestions.The possible achievements and innovation include: First,this study extends the current research on the correlation of term structure of interest rates of treasury bonds and China’s regulation policy;Second,the study finds possible explanation and empirical support for the “expectation mystery” in China,by using econometric model to test the applicability of expectation theory in the term structure of interest rates in China,and verify the correlation between the prediction error and the changing regulation policy during the same period.The conclusion of the paper includes: first,nowadays China is facing a transformation of economic structure and change for mode of development,accordingly the monetary policy is also under a transition from quantitative-guided to price-guided mode,in order to better manage the market expectation and maintain the stability of market behavior,the monetary authority should improve the central bank communication,enhance the transparency and effectiveness of monetary policy under reasonable guide of public expectations,thus to ensure the validity and reliability of the monetary policy.Second,policymakers and market participants need to pay more attention to the formation of the yield curve and its dynamic changes,which can help realize the function of price mechanism,improve the market resource allocation,and make financial markets better serve the real economy.