A Research On China’s Monetary Market Benchmark Rate Shibor

Lacking Benchmark Interest Rate have been hindering the development of China’sfinancial market. In theory part of this paper, we state the importance of BenchmarkInterest Rate and point out that there are four conditions needed to be satisfied inorder to construct one.People’s Bank of China claimed to foster Shanghai InterbankOffer Rate （SHIBOR） as the Benchmark Interest Rate of china’s monetary market.Sofar, they have been officially running for more than four years. From the perspectiveof whether SHIBOR curve have meet the four conditions of Benchmark Interest Rate,we analysis and test whether they have been able to take the responsibility as theBenchmark Interest Rate of china’s monetary market, Using Factor Analysis,Correlation Analysis, Granger causality Test and Impulse Response Analysis.Past literature on the role of Shibor as the money market benchmark rate is based onsingle-factor assumption. Different from it, we didn’t make assumption until weexplore the change of Shibor curve using Correlation Analysis and Factor Analysis.Research has shown that the analysis of Shibor curve can be simplified to the analysisof two common factor——a long-run factor and a short-run, which can be substitutedrespectively by shibor₁w and shibor₁y. Thus, instead of research the role of Shiborcurve as the money market benchmark rate, we just need to research that of shibor₁wand shibor₁y.The results show that Shibor curve within three months could function as theBenchmark Interest Rate of financial product pricing as they have already had theproperties of market-based, fundament and stability, however, Due to lacking theproperty of correlation, they cannot yet function as the Benchmark Interest Rate ofprice regulation of monetary policy.