What Does The Term Structure Tell Us About Macroeconomic Information?

The Government-Bond term structure of interest rates contains lots of macroeconomic information,such as the price index,economic growth,economic cycle and so on,that can fully reflect the running situation of macro economy,and provide the basis pricing information for financial and economic system.The researches show that there is a dynamic linkage relationship between the term structure of interest rates and the macroeconomic variables,and study the dynamic relationship plays an important role for interest rate risk management and asset pricing.In this paper,we construct the model of the term structure of interest rate and analyze the risk premium,which based on the Five-Factor Gauss Affine Term Structure model.At the same time,in order to further explore the macroeconomic informatio implied in the term structure of interest rate,we use UCM model to extract the long-term trend component and the short-term cycle component of macroeconomic variables.Later,we use a Time-varying Parameter Vector Autoregressive(TVP-VAR)to analyze the dynamic relationship between macroeconomic variables and the term structure of interest rate,and study the macro economic information implied in the term structure and term premium.Our results shows that the impact of macroeconomic variables and its components on the term structure of interest rate and the term premium are significantly different.The interest rates term structure of the Chinese Government bonds can provide much useful information for market participants to analyze macroeconomic shocks,and for policy-maker to develop monetary policy and so on.Generally speaking,the movements of China’s term structure matched the macroeconomic fundamentals well,and the interest rates term structure of the Chinese Government bonds can be effectively used as the indicator of macroeconomic operation.