Chinese Treasury Bond Term Premium And Macroeconomic Information

In 1981,Chinese government resumed issuing the treasury bonds,and established a central custody agency in 1996.Since then,China’s bond market developed rapidly,having a growing variety of bonds and a larger market size.At the end of 2016,China’s bond market issuance had up to 22 trillion yuan and bond stock was more than 57 trillion yuan.The rapid development of China’s bond market strongly requires people to conduct in-depth research on the bond yield curve,such as whether the expected hypothesis of interest rate term structure is valid and bond term premium with macroeconomic information.The expected theory of interest rate term structure is an important basis for pricing and risk management of financial derivatives.However,different studies on the expected theory of interest rate term structure show that there is a significant term premium behavior in the term structure of interest rate,and the term premium itself is also time-varying volatility.Therefore,the rational use of interest rate term structure needs to be based on the study of term premium.The term premium is the risk compensation required for future investment uncertainty,which reflects the market expectation and the risk aversion of the investors.It is also the current early warning index of the future trend of the macro-economy.Besides,it plays an important role in the asset pricing,risk management and the formulation of monetary policy.Studying the term premium helps to understand the risk tolerance of investors,determine the changing trend in long-term interest rate and predict future economic conditions.In recent years,many countries spend more time and energy on researching the term premium,especially the relationship among term premium,macro factors and monetary policy.As the treasury bond is issued by the central government,having the highest credit rating and strongest liquidity.Therefore,this paper studies the term premium of Chinese national debt market.Firstly,this paper makes an empirical test on the expected hypothesis of interest rate term structure and draws the conclusions that the expected hypothesis is not established in the Chinese bond market.Theoretically,there is indeed a term premium in the Chinese government bond market.Secondly,by constructing the five-factor affine rate term structure model,we estimate the term premium in the Chinese government bond market and obtain the three forms of term interest rate premium:the spot rate term premium,the forward rate term premium and the expected holding period excess returns.We also conclude that the three forms of term premiums exists a quantitative equivalence relationships.Generally speaking,the mean value of the spot rate term premium is larger than the mean value of the forward rate term premium,and the mean value of the forward rate term premium is larger than the expected holding period excess returns.Then,the macro-information of the term premium is analyzed by constructing the future interest rate combination.The results show that the future interest rate portfolio contains such a large amount of macro variable information that it an effectively predict the term premium.The term premium has a strongly relationship with economic growth and monetary policy.Finally,we point out that macroeconomic uncertainty,market segmentation and information asymmetry are the important reasons for the existence of premium in Chinese national debt market.Studying the maturity premiums in the Chinese government bond market can provide theoretical support for the pricing of financial derivatives and help to design more product types of financial derivatives;to provide benchmark interest rate support for the Chinese interest rate market and to better serve the financial marketization process;to help policy makers and investors carry out risk management effectively and to promote the operation of financial markets safely,healthy and perfectly.