Study Of The Inter-bank Money Market Interest Rates

The inter-bank money market is the main place for the financial institutes such as commercial banks to adjust and finance the short-term liquidity requirements. It is also important for the central bank to make open operations and carry out the moneytary policy and the financial manipulation. The inter-bank interest rates are representative of the market interest rate. Its term structure is not only the pricing standard of other financial assets, but also the important channel of monetary policy. Although there are many studies on the term structure of inter-bank offered rate and inter-bank repo rate with the Expectation Hypothesis, they don't pay more attention to the influence of term premium on the term structure, the depository interest rate on the term structure based on the facts of interest rate marketlization, also they seldom make the research on the prediction of the term structure.This paper analyzes the term structure on the basis of the theory and the empirical work. It constructs the test model including the time-varying term premium to study the inter-bank offered rate and the repo rate. What's more, it makes an analysis on the appropriate character of the term structure, the effect of the depository interest rate on the term structure, the term structure on the GDP growth. In addition, the controlling power of central bank interest rates on the inter-bank interest rate, the relationship between inter-bank interests will indirectly affect the term structure. Therefore, this paper also addresses these problems.In fact, this paper underlies the problem how to choose the benchmark rate. The controlling power of central bank interest rates on the interest rate, the appropriate term structure, the relationship between the interest rate and other economic variables is the requirement of the benchmark. It focuses on the three relations, and gives the following conclusions: the central bank can control and affect the inter-bank interest rate; the term structure of inter-bank offered rate and repo rate is inappropriate, which means the future short-term interest rate cannot predict the long-term interest, the depository interest rate has a certain influence on the term structure, also the term structure has the poor prediction on the GDP growth; the inter-bank offered rate and the repo rate have the close relations; the repo rate makes an appropriate response to the GDP(one to one). According to the above, draw the conclusion that repo rate can act as the benchmark rate at present.The main content and conclusions are as follows: In Chapter 1, this paper makes the introduction on the surroundings, the meaning, the research technique, the innovation and the future research. In Chapter 2, it sums up the related term structure, which is the theoretical foundation of this paper. Moreover, it analyzes the present study, point out its shortage, which become the research point.In Chapter 3, this paper firstly considers the teatures of market interest rates according to the size of risk. The outstanding defect is that the rediscounting rate and government bond interest rate are higher than depository interest rate, which means the return is not matched with its risk. Therefore, the depository interest rate, rediscounting rate and government bond interest rat cannot be set as the benchmark interest rate. In fact, most of the scholars support the inter-bank offered rate and the repo rate as the benchmark. This chapter lays the good foundation for the further study of the inter-bank interest rates.In Chapter 4, this paper analyzes the influence of the central bank rate on the inter-bank offered rate and repo rate. That is, the influence of relending rate of central bank on the inter-bank offered rate, the repo rate of the open marker operation of central bank on the inter-bank repo rate. This reflects whether inter-bank interest can be controlled or not.In Chapter 5, we firstly study the determining factors of the inter-bank offered rate. The empirical result comes out that the depository interest rate, the excessive depository reserve interest rate and the inter-bank repo rate have an obvious effect on the inter-bank offered rate. Then we examine the term structure with the Expectation Hypothesis, and we also add the time-varying risk premium to the model, but it doesn't hold true in the inter-bank offered market, which means the spread between long term rate and short term cannot predict the future interest rate, in turn the future short term interest cannot predict the long-term rate. In addition, we also think the prediction of the inter-bank offered rate to the GDP growth.In Chapter 6, we firstly study the determining factors of the inter-bank repo rate. The empirical result comes out that the depository interest rate, the excessive depository reserve interest rate and the inter-bank offered rate have an obvious effect on the inter-bank offered rate. Then we examine the term structure with the Expectation Hypothesis, and we also add the time-varying risk premium to the model, but it doesn't hold true in the inter-bank repo market, which means the spread between long term rate and short term cannot predict the future interest rate, in turn the future short term interest cannot predict the long-term rate. In addition, we also think the prediction of the inter-bank repo rate to the GDP growth.Chapter 5 and Chapter 6 analyse the predictability and risk of the inter-bank rate.In Chapter 7, this paper gives an analysis of the relationship between the inter-bank offered rate and repo rate. They display the high relations above 80ï¼…except the 4-month rate. We study the cointegration between the 7-day in these two markets. But there exist the spread between the same term interest rate, which results from the term premium and the liquid risk. The liquid risk is defined as the spread of transaction volumes. We also examine cause of the high liquid risk of the inter-bank offered market.In Chapter 8, we mainly study the channel from the central bank interest rate to money market rate, which is from the central bank rate ot the inter-bank repo rate to the inter-bank rate. We also study the role of inter-bank rate in the money policy channel, and also give the recommendation of the selection of benchmark rate and the improvement of the interest rate channel of money policy. Based on the analysis from Chapter 4 to Chapter 7, we cannot decide on which one should act as the benchmark rate in the money market due to the inapproperate term structure and poor predictability of inter-bank offered rate and repo rate. So, we construct the respondent function on the basis of Taylor Rule, which prove that the repo rate gives an approporate reponse to the GDP gap. Then we examine the efficiency of repo rate channel in the money policy. At last we give the thorough analysis of the characters of inter-bank rate, concluding that the repo rate is better than offered rate as the benchmark. We make some suggestions on the role of benchmark and on the efficiency of interest rate channel.