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A Study on Nurtuirng of China’s Benchmark Yield Curve and Its Application Value

Author: ZhangXiaoYan
Tutor: ShenZhongHua; LiangZuo
School: Nankai University
Course: Finance
Keywords: Interest Rates Liberalization Benchmark Interest Rate BenchmarkYield Curve Yield Curve Prediction
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Type: PhD thesis
Year: 2012
Downloads: 52
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Abstract


The nurturing of China’s benchmark interest rates and benchmark yield curvebecomes necessary in order to foster the process of interest rates liberalization andfinancial innovation. It is a necessary choice of monetary policy to adjust theeconomy by influencing the benchmark interest rate and benchmark yield curveindirectly.The benchmark yield curve reflects the relation between long and short un-riskyinterest rates, so it is the reflection of monetary policy. The central bank analyzes theconduction of monetary policy from the benchmark yield curve and its movements,changes the expectations, then directs and influences the term structure of interestrates. This paper focus on:(1) how to nurture the benchmark yield curve of China;and (2) investigate the implication value of yield curve on the economy control，especially the development and implementation of monetary policy. The main worksare as follows:First，based on the rural China’s data of1978to2008, we assesse theperformance of the interest rates liberalization by setting an institutional variable.First we test the stability and cointegration of the data, and then test the Grangercauses of interest rates liberalization and other major macroeconomic variables underthe framework of VAR model. Second a Structural VAR model was set and based onwhich an impulse response analysis was done. Lastly a MARMA model was built tomeasure the exact impact of interest rates liberalization on macro-economy. Somepolicy implications then provided. The result shows that the policy of China’s interestrates liberalization is effective, which directly influences the growth of loan,investment and saving, promote the growth of production, consumption and residuals’income. So the reform should be continued. The key step of next reform is loose thecontrol of the deposit interest rates and the nurturing of benchmark interest rate,which would make the interest rates reflect the money’s demand and supply.Second，based on the stationary and cointegration tests of monthly data from2007M01to2010M03, under a framework of the multivariate Vector Autoregression Model, we test the Granger causes under the VECM model and make the impulseresponse analysis. It is found that at the short term part of benchmark yield curve, thebenchmark position of Shibor should be strengthened, interest rates of central bank’snotes function well, central bank’s benchmark rates of deposit and loan contains largeinformation of financial markets, the repo rates of government bonds in exchangemarkets are very important but the benchmark position in the long term should alsobe strengthened. The structuring of complete China’s yield curve faces a lot ofchallenges.Third, in order to investigate the term spread’s predict power of China’seconomic growth, we choose the appropriate data of economic growth and termspread, calculate the time correlation coefficients, run OLS regression of benchmarkmodel and calculate standard error by Newey-West method, and compare the predictpower index. Then calculate the factors of yield curve by Svensson model, to explorethe short and long factors’ predict power of China’s inflation rates. Based on that, wetry to find the possibility of real time prediction of China’s macro-economy by yieldcurve.Fourth, in order to explore the possibility of yield curve to be China’s monetarypolicy tool, start from the practice of China’s monetary policy of the latest year2011,we study the central bank benchmark interest rates of loan and deposit and Reserveratio, build a Vector Auto-Regression model to explore the relation of yield curve andmonetary policy variables. Preliminary we provide some monetary policy operationmethod based on the benchmark yield curve.Fifth, we summarize six elements of benchmark yield curve, and analyze theexisted yield curves in China’s financial market to discuss whether they have thosefeathers. We find that inter-bank government bonds, financial bonds of policy,business banks bonds, etc. place an important role, their interest rates system is theoptional choice of benchmark yield curve. The ideas of structuring China’sbenchmark yield curve may include:(1) focus on fostering government bond yieldcurve,(2) Segment design, and (3) overall re-structuring.

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