China’s Term Structure Of Interest Rate And Its Relationship With Macroeconomic Fundamentals

Research on the term structure of interest rates play a very important role in economic and financial research, it is essential from the valuation and pricing of most simple bond and stock to the pricing of financial derivatives, interest rate risk management, investment management, and central bank or monetary policy makers, However, the estimated term structure has been plagued by academics and practitioners Which attracts a lot of scholars engaged in research in this area, and proposed a lot of methods for term structure estimation. But, the existing literature shows that macroeconomic factors are often ignored in the fitting and modeling of the term structure of interest rates. For this reason, this paper mainly studies the relationship between yield factors, factor volatilities and macroeconomic fundamentals.We take the weekly closing data for the last trading day of China’s inter-bank bond market from October 2009 to August 2013 as the research sample, using Markov chain Monte Carlo simulation based on Bayesian inference(MCMC) method to estimate the dynamic Nelson-Siegel model with stochastic volatility proposed by Hautsch & Ou(2008). We also analyzed the relationship between the yield factors, factor volatilities and macroeconomic fundamentals. The results show:(1) The macroeconomic fundamentals have significantly affect yield factors, but But in addition to monetary policy has impact on the curvature volatility, the macroeconomic fundamentals do not significantly affect the factor volatilities.(2) In the short term, in addition to monetary policy lag have a short-term prediction power for slope, the yield factors are not predictable based on macroeconomic fundamentals, however level and curvature factors have significant short-term prediction power for macroeconomic variables. In addition, the slope factor doesn’t have significant short-term prediction power for macroeconomic variables. On the other hand, all factor volatilities don’t have significant short-term prediction power for macroeconomic variables, however slope volatility can be predicted by monetary policy, level and curvature volatilities cannot be predicted by macroeconomic fundamentals.(3) In the long run, the yield factors have a long-term prediction and explanation power for the macroeconomic fundamentals, but it’s not strong; Macroeconomic fundamentals also have a long-term prediction and explanation power for yield factors, especially they have a long-term prediction and explanation power for slope. On the other hand, macroeconomic fundamentals have a long-term prediction and explanation power for all factors volatility, but it’s not strong; Factors volatility have a long-term prediction power for the inflation rate, little predictive power for the economic growth, and a long-term predictive power for monetary policy.