Linkages Between China And U.S. Interest Rate Swap Markets

Economic globalization and financial integration have deepened on one another between countries,thus adjust expectations of interest rate policy of major economies in the world will inevitably influence monetary policy adjustments and financial stability of other countries.China and U.S.,as the two major economies in the world,have an increasing economic dependence,then interactions between their monetary policy expectations are changing.Now China's monetary policy framework is transforming from quantity to price,and the interest rate has been becoming one of the most important intermediate targets of monetary policy.So how to guide market interest rate expectations will directly influence effects of monetary policy adjustment and expectation management of China's central bank.Therefore,it is significant for China's central bank to analyze changes and the co-movement of market participants' interest rate expectations in the period of China's economic transition.We use multi-scale analysis method to research the linkages between China and U.S.interest rate swap markets,and then discuss interaction effects of their monetary policy adjustment expectations.Interest rate swap is the most actively traded products in the interest rate derivatives market.Swap rates contain market participants' interest rate expectations.Interest rate swap spread is the difference between swap rates and treasure yields with the same maturity,which implies risk premium in the banking sector and is a key factor to measure swap rate.This paper will analyze the linkages between China and U.S.interest rate swap markets with interest rate spreads.First,interest rate swap spread decomposition models are built from the perspective of interest rate risk management of commercial banks,then analyze interest rate swap market's connection function between money markets and bond markets in theory.Compared to the factors of swap spreads based on its decomposition models,we give improvement advises on interest rate expectations guidance of China's central bank and interest rate risk management in the banking sector.Second,we analyzed the linkages between the two interest rate swap markets by multi-scale analysis method.Strength of linkages between the two swap markets is measured through time-varying correlation coefficientby the Ensemble Empirical Mode Decomposition algorithm and Time-dependent intrinsic correlation methods because the two group serials have different order stationary.Direction of linkages between the two swap markets is measured through the Granger Causality Test.Furthermore,short-term and long-term impacts of U.S.interest rate adjustment's expectation upon interest rate expectations in China are discussed in this paper.The results are as follows.From the perspective of the interest rate risk management of commercial banks,the interest rate swap spread can be decomposed into three parts: the swap carry,the bank funding cost and the interest rate volatility expectation.There are stable long-run equilibrium and causal relationship among the three parts,which implies that interest rate swap connects money markets and bond markets.Based on decomposition of interest rate swap spreads,we find,from the perspective of interest rate swap spread factors,short-term dollar interest rate swap spread is mainly influenced by bank funding cost and interest rate volatility expectation,while long-term dollar interest rate swap is mainly influenced by swap carry and interest rate volatility expectation.RMB interest rate swap spreads,whether short-term or long-term,are mainly influenced by bank funding cost and interest rate volatility expectation.Compared to dollar swap spread,the main influence factors of RMB swap spread are changing dramatically.In the aspect of linkages between the two swap spreads,there exists strong time-dependent contemporaneous correlations between China and U.S.interest rate swap markets,but the linkages strength between the two interest rate swap markets are weakening with a longer maturity.The result of the time-dependent intrinsic cross-correlation denotes that there is no significant time lag in the short term,but there exists the long-term lag.Finally,we use the Granger Causality Test to analyze the the direction of the swap market linkages.The result is that there exists two-way causality relationships between China and U.S.interest rate swap markets in the short term,but the relationships are weakening with time.The two interest rate swap marketsare still mainly influenced by their own monetary policy adjustments and financial market volatility.In a word,the research will help the central bank to enhance the guidance ability of interest rate expectations,increase the efficiency of monetary policy transmission and ultimately achieve the goal of macroeconomic regulation.