Research On The Relationship Of The Macro

With the development of financial reform in China and the treasury bond products'innovation, China's bond market, especially the rapid development of the inter-bank bond market, interest rate indicators become increasingly important. At the same time, in China, the focus of the research of term structure gradually changed from the static fittings to dynamic studies. In this context, the relationship between macroeconomic policies and yield curves has gradually become a focus of attention.In 2003, Bernanke argue that theoretical macroeconomic aggregates might not be observable, and the central bank does not base its decisions just upon a few theoretical macroeconomic variables. Consistent with this argument, Bernanke suggested a new model to study monetary policy which he labels as "Factor-Augmented VAR". Due to the close relationship of monetary policy of central bank between yields of bond, the FAVAR model suggested a new approach to study the dynamics of monetary policy and yield curve. In 2006, Monch employ the FAVAR model to study the dynamics of the yield curve within an arbitrage-free model, which he called as "No-Arbitrary Factor-Augmented VAR". The model provided very good in-of-sample result and seemed to show a striking superiority with respect a number of traditional term structure models.In this paper, I employ the FAVAR model to study the dynamics of the entire yield curve within an arbitrary-free team structure model. Precisely, I use FAVAR model to deliver a dynamic characterization of the short-term interest rate conditional on a set of factors which I extract from a large number of macro time series. Given the dynamics of the short-term interest rate, the yield curve of Chinese Treasury bond is derived using a arbitrary-free affine team structure model. Simply, I use a Factor-Augmented VAR as the state equation of an affine team structure model.Through empirical research, I first discovered FAVAR model can describe the dynamics of China's short-term interest rates well; and I find the FAVAR factors that I extracted from a large number of macro variables have a relatively strong correlation with China Treasury bond yields of different maturities; finally, as the ultimate goal of this study, I find that the no-arbitrage-FAVAR model fits China Treasury bond yields well, especially for short and medium-term maturities.