Theories And Applications Of Term Structure In China

Term Structure is the curve formed by interest rates of different maturities. It is the benchmark for asset pricing, financial product design, hedging, risk management, arbitrage and speculation. Therefore, the research on term structure is always a basic research in finance field. With the development of financial markets, the deepening of financial innovations and the market-oriented process of interest rate, the importance of term structure research is more and more obvious in China. But the reality is that we still have not made a systematic research on it. This paper is aimed at this goal, making some pioneering research on term structure of China, driving some reasonable conclusions on term structure of China.This paper first reviews systematically the research on term structure, then analyzes the relevant theories in details, studying the relationship between term structure and the asset pricing theories, such as stochastic discount factor theory, no arbitrage pricing theory and risk neutral pricing theory, thus establishes a robust theoretic base for term structure research. In empirical test part, this paper uses the bond price of Shanghai Stock Exchange to study the static character and dynamic behavior of interest rate in China, including the shape of term structure, liquidity premium, default risk premium, dynamic behavior of government rate and market rate, the relationship between market rate behavior and government actions, and main factor analysis of term structure, etc. Some reasonable conclusions are driven by empirical tests. In the application part, this paper utilizes the basic theories of financial engineering, putting forward a significant proposition, i.e., the basic asset and liabilities of banks imply some options. By the empirical results, we price these options, which are very important for financial innovation of banks in China. We also price the convertible bonds in China, finding that the convertible bonds are highly under priced compared with the theoretical prices. This under-pricing can only be due to the market inefficiency. In the end, this paper study the difference of term structure between Shanghai Stock Exchange and Inter-Bank Market, making some suggestions on the unification of bond markets.In all, this paper is to make a full and systematic research on term structure of China, including the theoretical analysis, empirical tests, applications on pricing, and policy suggestions.