The Impact Of Central Bank Communication On Long-term Bond Market In China

A notable change in central banking over the past 15 years has been a worldwide movement toward increased communication by central banks about their policy decisions,the targets that they seek to achieve through their decisions and the central bank's view of the economy's likely future evolution.This paper considers the role of such communication in the successful conduct of monetary policy,with a particular emphasis on an issue:to what extent does central bank communication affect return and volatility of long-term Chinese bond market?This study examines impact of the central bank communications on the distinctive behavior of long term interest rate in China,by focusing on the reactions of the market participant's confidences and herding behavior.This study first develops a theoretical model and employs it for stochastic simulations to show that volatility of bond prices and trading volumes are affected by dozens of factors,ranging from the participant's confidence to the value of the public information.And the model is fitted to actual data(10Y Chinese treasury bond interest rate)from 2016 to 2017.The model demonstrates that the reaction of long-term interest rate on central bank communication lies in how investors interpreted the information in market,especially the communications by The People's Bank of China regarding its policy.However,the central bank cannot arbitrarily control the value of public information.Since the information flows contains vast amount information that bond investors process and the value of central bank information depends on its relationship with other public information.Besides,the central bank should cherish a clear thought of how fast investors' confidence should be increased.In the herding model in this paper,an increase in the value of public information amplifies the bond market volatility in the short term.Therefore,the central bank should make the optimal choice regarding the trade-off between short-term and long-term interest rate volatility in communicating with the public.This paper then employs data from 2016 to 2017 in China to establish an EGARCH model.Using intra-day rate of return of 10Y bonds,this paper reaches four conclusions.First,with more deals comes more rational price containing the information flows.Secondly,The People Bank of China chose to rise the value of public information to lower the financial leverage and therefore amplified the interest rate volatility in the study period.Thirdly,the central bank communication first affects YTM volatility and raises the mean of interest rate afterwards.At last,CPI is no longer the most important factor that influences the bond price as before.