Theories And Applications Of Static Term Structure Model Of Interest Rate In The Bond Market

The relationship between the term structure of interest rates and macro-economic, monetary policy has been important areas of finance research, however, the development of China’s bond market is late, severely restricting its role in monetary policy implementation and observation of macro-economic aspects. In recent years, China’s bond market has rapid developed, the market is gradually increasing, the relationship between bond market and macroeconomic, monetary policy has been increasing, at this time, the research has important practical significance.In some countries which has mature financial markets, the term structure of interest rates is an important tool of monetary policy and macro-economic forecast, there is a stable relationship between them. The term structure of Interest rates can be used to forecast future changes of macro-economic as leading indicator, the central bank can use these information to enhance the rationality of its monetary policy.The term structure of interest rates reflects the spot rates of zero coupon bonds, and it is an important variable in this article. But China’s bond issued mostly interest-bearing bonds, therefore, fitting the term structure need a rational estimation method, In this paper, including two aspects, one is fitting the term structure of interest rates, another is the application of the term structure of interest rates. The content is divided into five chapters.The first chapter is introduction, including two aspects. One is research background and significance of the topic, the other is literature review.The second chapter is the theory of the interest rate term structure and its application. It includes market expectations theory, market segmentation theory, liquidity preference theory and the theory of relationship between the term structure of interest rates and macro-economic, monetary policy.The third chapter is fitting of the term structure of interest rates. It includes spline method, principal component analysis, descriptive analysis of the term structure of interest rates, the macro-economy index and monetary policy.The fourth chapter is an applied research of the term structure of interest rates, it use VAR model to discuss the relationship between the term structure of interest rates and macro-economic, monetary policy.The fifth chapter is the conclusions and recommendations.Based on the above ideas, this paper includes six conclusions.(1) The article select the Shanghai Stock Exchange bonds data on June30,2011to empirical analysis, getting the mean square error of fitting price and the actual price gap, the discount rate and interest rate term structure curve. The features of this curve suggest that the spline method is suitable for fitting the Term Structure in china.(2) Foreign empirical studies have shown the term structure of interest rates can be decomposed into three main ingredients of the three principal components are defined as a level factor, tilt and curvature factors, In order to verify whether the interest rate term structure in China to meet three main compositional characteristics, we select11main interest rates to call the shots composition analysis. It concluded that China’s bond markets are consistent with the characteristics of the three main ingredients, and the characteristics of the three main ingredients consistent with foreign bond markets.(3) The analysis of this section, adding descriptive analysis of our monetary policy implementation and macroeconomic fluctuations, then comparing to the dynamic characteristics of the term structure of interest rates during this time, it concluded that the change of interest rate term structure has relationship with our monetary policy operations and macro-economic volatility.(4) On the one hand, there is a cointegration relationship between the term structure of interest rates and money supply (M2), the model of short-term error suggests that the long-term cointegration relationship is stable. On the other hand, the pulse response analysis suggests that the term Structure of interest rates response of the money supply (M2).’The variance decomposition of the term structure and the monetary base (MO) to money supply (M2), variance contribution rate is maintained at about20%. The above analysis concluded that the term structure of interest rates including the Information of monetary policy, it can play the role of the implementation of monetary policy.(5) On the one hand, there is a cointegration relationship between the term structure of interest rates and macro-economic climate index, the model of short-term error suggests that long-term cointegration relationship is stable. On the other hand, the pulse response analysis suggests that the Term Structure response to the pulse of the macro-economic climate index is weaker than the macro-economic climate index response to the pulse of the Term Structure. The variance decomposition of term structure to the macro-economic climate index, variance contribution rate is increased gradually. The above analysis concluded that the term structure of interest rates including the information of macro-economic climate index, it can be used to observe the macro-economic movements.(6) On the one hand, there is a cointegration relationship between the term structure of interest rates and CPI, the model of short-term error suggests that long-term cointegration relationship is stable. On the other hand, the pulse response analysis suggests that the Term Structure response to the pulse of CPI is weaker than CPI response to the pulse of the Term Structure. The variance decomposition of term structure to CPI, variance contribution rate is increased gradually, the term structure of interest rates in the conduction of inflation has some validity, however, the variance contribution is about5%, it show that the term structure of interest rates has weak power to decide inflation. So the term structure of interest rates monitor on inflation has weaker effect than macro-economic.Although there are more literatures of the term structure of interest rates, this article has its own characteristics, it can be summarized as follows.(1) This article use static model to fit the term structure of interest rates, static model based on the principle of minimize gap between fitting the price and the actual price, using the spline approximation method to avoid the assumed conditions of a dynamic model.(2) This article use analytical method and the principal component analysis to study the movement characteristics of the term structure of interest rates, exploring the relationship between and macro-economic, monetary policy.(3) Based on the monetary policy transmission mechanism, this article use VAR model to explore the term structure of the interest rates whether validity of conduction.