Research On Influencing Factors Of China’s Interbank Bond Pledged Repo Rate

China’s bond market is a unified hierarchical market system,including three sub-markets,namely,the inter-bank market,the exchange market and the commercial bank counter market.The inter-bank market holds the dominant position in China’s bond market which is a block trading market.The participants are mainly domestic institutional investors,ranging from banks to non-bank financial institutions.The deals are traded based on bilateral negotiations.The inter-bank bond repurchase market is a sub-market of inter-bank money market,and has developed into the main platform of liquidity management for financial institutions of all kinds,open market operation for the Central Bank of China.Interest rate is the most sensitive indicator that reflects the supply and demand of capital;comparatively,the repo rate is the most important indicator to reflect the inter-bank bond repurchases market liquidity.The pledged repo transaction is secured by the pledge of bond,which effectively reduces the risk of trading parties.To some extent,the pledged repo rate is the risk-free interest rate,so it is usually considered as the benchmark interest rate of money market.The collateral repo rate of inter-bank bond has been the focus of scholars’ research for a long time.This paper firstly elaborates on the development process ofChina’s inter-bank bond repo market by dividing it into three periods according to periodical characteristics.Supported by data analysis,the paper discusses the current situation of the market,including deal traders,trading products,means of trading;analyzes the significant role the market plays in money market.Theoretically,this paper discusses the traditional interest rate determination theories on the basis of previous studies,namely,classical interest rate theory,liquidity preference theory,loanable fund theory and IS-LM interest determination theory;then analyzes main influence factors of the inter-bank bond pledged repurchase interest rate and their fluctuations relation with it.Quantitatively,the paper focuses on the empirical study of 7-day inter-bank bond pledged repo-rate and how,and to what extent,it is affected by the selected factors.The selected factors include Consumer Price Index(CPI),money supply M2 growth rate,legal deposit-reserve ratio,expected yield of bank financial products,7-day Shanghai Interbank Offered Rate(Shibor),7-day London Interbank Offered Rate(Libor)and RMB rate,which cover from Jan 1st,2007 to Dec 31 st 2016.Based on above data,the paper builds vector auto-regression(VAR)model,analyzes the lead-lag relationships between every two indexes by Granger Causality Test.Fatherly,the paper does impulse response and variance decomposition analysis,attempting to find out how the selected factors influence the repo rate in the subsequent periods.The empirical results show that the 7-day inter-bank bond pledged repo rate is predominantly determined by its own level,the legal deposit-reserve ratio and Shibor;7-day inter-bank bond pledged repo rate and Shibor are Granger causalities of each other.They both play the key role of the benchmark interest rate,leading the change of money supply M2 growth rate and expected yield of bank financial products.CPI is Granger causality of M2 growth rate,but not of 7-day inter-bank bond pledged repo rate.Libor and RMB rate only increase pledged repo rate in short time,while has little effect in the long period.In the end,this paper puts forward policy proposals on how to improve the operation mechanism of the inter-bank bond repo rate,including establishing appropriate interest rate regulate and control mechanism,strengthening liquidity management of banks,enhancing product structure innovation and perfecting bond repurchase mechanism.