An Empirical Study Of The Factors Which Affect RMB Interest Rate Swap Spreads

Since 2006,RMB interest rate swap has developed more than ten years and has gradually become one of the most important interest rate derivatives in China,which was driven by interest rate liberalization of China and the mechanism of central counterparties.The development of RMB interest rate market has not only made an important contribution to the Chinese financial institutions’ management of interest rate risk,but also contributed to the development of the Chinese bond market and the improvement of the formation of bond yield curve in China.Nevertheless,there are some problems in the current CNY IRS market,such as insufficient effectiveness of benchmark rate,single structure of participants and poor effect of hedging interest rate risk of bonds.A profound study of the factors which affect RMB interest rate swap spread is helpful to the study of pricing mechanism of RMB interest rate swap.Besides,it also helps to promote the stability and development of financial market in China,to improve enterprises’ ability to manage assets and liabilities and to manage interest risks and to meet all the needs of all kinds of market participants,which has a far-reaching theoretical and practical significance.This paper makes a comprehensive study of the factors which affect RMB interest rate swap spreads both theoretically and empirically.Based on the characteristics of the bond market and the IRS market of China,this paper theoretically analyzes the action mechanism of the bond swap arbitrage strategy and the bond swap spread trading strategy commonly used in the interbank market on the IRS spreads from the perspective of risk-free arbitrage.And this paper summarizes four factors that affect the RMB interest rate swap spreads significantly: interest rate level,difference of financing cost,interest rate volatility and the bond market leverage.Finally,considering the characteristics of interbank market of China,the spreads between the interest rate swap of FR007 and the bonds of China Development Bank are selected as the specific study object and then the vector autoregression model of all terms of IRS spreads is built.Each specific factor which affects RMB IRS is empirically analyzed with the impulse response function mingled with Granger causality test.The results showed that RMB IRS market and the CDB market have not reached the weak efficient market,and the technical analysis of the interest rate swap spreads is helpful to predict the future trend of the interest rate swap spreads.The general interest rate level,difference of financing cost,interest rate volatility and bond market leverage have a significant impact on the RMB interest rate swap spreads through the trading behavior of market participants in their respective ways.The general interest rate level and difference of financing cost are the factors that affect all term interest rate spreads.And the interest rate volatility has a greater impact on the long-term interest rate swap spread while the bond market leverage has a larger impact on the medium-term interest swap spread.Finally,this paper puts forward some policy suggestions on the problems of the RMB interest rate swap market.First,commercial banks need to take the responsibility of educating enterprises how to use interest rate derivatives to hedge interest rate risks and introduce more enterprises into the interest rate swap market.Secondly,there is still room for improvement in the formation mechanism of the benchmark interest rate.Thirdly,more financial institutions need to be introduced into the RMB interest rate market so that the pricing ability of interest rate swap can be improved.Fourthly,we should develop the floating rate bonds in the interbank market of China.Besides,this paper also puts forward some trading strategy recommendations based on the result of the empirical analysis.