The Research On The Risk Features, Variation Law And Risk Management Of Treasury Yield Curve

As the deepening of China's financial market reform, China's Treasury bonds market becomes well-developed and mature, illustrated by the highly increased frequency and enlarged scales of new issues as well as market-oriented pricing mechanism of treasury bonds. Furthermore, the purposes of issuing are diversified, from financing for the country's economic construction and the deficit of fiscal income to through controlling the supply of money to influence the credit of the whole market. The issuing mechanism, trading rules and functions of China's treasury bonds markets are very similar to those of mature treasury bond markets, as a result, it is very crucial and meaningful for the participants of financial markets and policy makers to implement research on the risk characteristic and variation law of the term structure of interest rate and interest risk management. Therefore, in this paper, we firstly focus on the analysis of risk characteristic of the term structure of interest rate and intend to figure out the common and unique the risk features of China's term structure of interest by comparison with the risk features of the counterparties in mature Treasury bond market. Through this analysis, we can on one hand evaluate the performance of the reform of China's treasury bond market and empirical evidence to help the participants of China's treasury market to understand the basic risk and variation features of treasury bond price, on the other hand lay a foundation of further reform of China's treasury bond market by recognizing the difference between China's treasury bond market and mature treasury bond market. Secondly, based on the first analysis, we will figure out the macro-economic foundation of risk features and variation laws of the yield curve, dig out information implied in the term structure of interest rate which can reflect the performance of macro-economy and find out the factors that drive the variation of the term structure of interest rate by exploring the relationship between the term structure of interest rate and macro-economic variables. Thirdly, based on the findings of macro-economic foundations and driven factors, we will continue to focus on the research on dynamic variation law of China's terms structure of interest and through this research, we can not only recognize on theory the factors influencing the dynamic variation of the yield curve, but also set up the empirically mathematical model to describe the variation law of the yield curve, helping us understand the variation law of the yield curve as well as predict the forward evolution of the yield curve in possession with the past and current market information. At last, supported by all the above analysis, we will choose the duration model which can fit the risk features of China's yield curve to hedge the interest rate risk and then add the research on variation law of yield curve to the modified traditional duration model. The test shows that the new created duration model does improve the efficiency of using the market information of duration models, promote the risk hedging performance and therefore provide a better alternative for the involvers of treasury bond market to hedge the interest risk of their portfolios.The main results and innovations of this paper are as follows:1. Estimating The Term Structure of Interest Rate of China's Treasury Bonds By Using The Panal-Data Based "Two-Step" methodEstimating the term structure of interest rate from the prices of treasury bonds efficiently and accurately is the premise to researching on the risk features, variation laws, interest risk management as well as digging out the implied macro-economic information of the yield curve. Therefore, scholars from different countries bring out various models and methods to solve this technique problem. Although these methods and models can extract yield curve from the bond prices, the performance of these methods and models vary substantially in terms of efficiency and accuracy. Hence, it is very necessary to evaluate the performance of current estimating models and methods for choosing a better alternative which after some improvements can be used as a solid way to extract yield curve from bond prices. Based on the above logic, we bring out and use the panal-data based "two-step" method to estimate the China's bonds yield curve, a method which not only promote the estimating accuracy, but also improve the estimating efficiency as well. Further research reveals that the estimating method we take in this paper perform far better than other traditional estimating method in terms of estimating efficiency, robustness and accuracy. We will use the yield curve estimated by the method brought out in this section as the standard data for the further research in this paper. 2. Analysis on The risk features of Term Structure of Interest rate of ChinaIn chapter 3, we focus on the risk features of the term structure of interest of China and the factors that determine the interest risk. By contrast with the term structure of interest rate of the United States, we find that the change of Chinese term structure exhibits the following different features:unsmooth moving, parallel shifting of middle-term and long-term rate, more volatility of long-term rates, and right-skewed distribution. By analyzing the correlations of long-term rate, the spread between long-term rate and short-term rate, middle-term rate to the corresponding three key factors got from principal analysis, we found that the level factor and the slope factor can explain most of the variations of Chinese term structure of interest rate, while middle-term rate contribute little to the variations. The research in this chapter help people deeper understand the variation law of risk features of term structure and provide theoretical and empirical support for managing interest risk more efficiently.3. Research on The Relationship Between Term Structure of Interest Rate and Macro-Economic VariablesIn this chapter, we first explore the implied macro-economic information of the term structure of interest rate. we find that they all follow one-term lag autocorrelation distribution process. In addition, through time-lag correlation analysis, we found that long-term rate move ahead of CPI for 3 months and spread of long term rate and short term rate is the coincident indicator cycle indicator, both of which can be as good measure of evaluating and forecasting the performance of macro-economy. The further research reveals that in the short run, monetary shocks will decrease the level of interest rate and increase the level of output. However, in the long run, the level of interest will go up and get its peaks after 3 or 4 quarters due to the increased monetary supply and inflation expectation and stimulus to output will be weakening and though the results of VEC models with the variables of interest rates, output, monetary shocks and inflation expectation. The research in this chapter can on one hand provide the economic explanation of the risk features of term structure of interest rate, on the other hand help us understand how the change of macro-economic variables impact on yield curve, laying the foundation of the further research on the dynamic variation law of the yield curve.4. The Research on The Dynamic variation law of The Term Structure of Interest RateTraditional methods to model the dynamic process of term structure of interest are based on arbitrage-free or general equilibrium theory and the parameters of the models are estimated basing on the information at one time point without considering the historical bond price information, causing the estimated model with fixed parameters and failed to fit the dynamic variation of yield curve. Our research reveals that the parameters of Nelson-Siegel curve can exclusively determine the shape and risk properties of term structure of interest, therefore we use these parameters estimated by Panal-Data method as the fundamental elements to depict the yield curve. Based on the research of chapter 4, we find that the parameters which determine the yield curve move ahead of M1 growth and the correlation between them are high. By setting up the linear regression model of the parameters of Nelson-Siegel curve and lagged Ml growth, we can analyze the dynamic variation law of the yield curve. The research indicates that the forecasting interest rate made by the methods based on the relationship between parameters of Nelson-Siegel curve and lagged M1 growth performs far better than that made by other methods in terms of robustness and accuracy, demonstrating it is a better way to model the dynamic variation of the yield curve as well as laying the foundation to improving the traditional duration model in next chapter.5. Research on The Interest Rate Forecast Based Duration ModelIn this chapter, based on the risk features and dynamic variation law of the term structure of interest rate, we find that Nelson-Siegel duration model is superior in hedging interest risk compared with the other duration models. Further research reveals that in the long term the performance of Nelson-Siegel duration model get worse when there are no adjustments of bond portfolios responding to the change of interest rate during the holding period. In this chapter, we improve the traditional Nelson-Siegel duration model supported by the M1 growth based interest rate prediction and bring out a multi-period adjusted duration model. Compared with the tradition duration models, the new model shows the obvious advantages of hedging interest risk in terms of the accuracy and robustness and is a competitive alternative for the treasury market participants to manage the interest risk of bond portfolios.