An Event Study On Yield Volatility Of Bonds In The US And China

There is no doubt that the rapid development of Chinese economy is calling for an efficient domestic financial market. The treasury market is an important part of the financial market, not only in macro economy activities such as the open market operations, but also in micro economy activities such as in financial asset pricing and interest rate risk hedging. What are central to the operation of treasury market are the prices and yields of the treasuries.Finance theory states that the price of fixed income securities is the sum of the present values of expected cash flows. The discount rate used to calculate the present values, i.e., the interest rate, will directly affect the price of the securities. Therefore, the effect of the adjustment in fundamental interest rate on fixed income securities is a hot issue in finance.This paper examines empirically the impact of interest rate rise on the treasury markets based on the Expectations Hypothesis by comparing the yields in U.S.A and China. In this paper, the effects of interest rate rise are tested by event study. Firstly, the yield curves of treasury market before and after interest rate rise in both US and China are compared. It is shown that the volatility in Chinese market is obviously greater than that in America and that the yield of 1-year treasury in China is lower than 1-year deposit interest rate. Secondly, the different volatility is studied through the event study. It is shown that the range and trend of the volatility of the treasury markets in America and China are significantly different when raising the interest rate. Changes in American market are small in range before the announcement of interest rate rise. The market performance shows the reaction of American market is quite impassive. But the Chinese market responses rapidly and greatly to the news. It is found that the volatility and instability on the yield in China is significantly greater than that in the United States.