Macroeconomic Information And Yield Structure Of China's Bond Market Predictability

Bond market yield curve and return play a very important role in both finance and economy. From a finance perspective, bond market yield is one of the key elements which determine capital assets pricing. From a macroeconomics perspective, it is a policy instrument under the control of the central bank, which adjusts the rate to achieve its economic stabilization goals.As illustrated by much western research and experience, there are strong links between macroeconomic variables and bond market yield curve and return, which is a key concern of government, scholars and market investors.This thesis describes the joint dynamics of China bond market yields and macroeconomic variables in a Vector Auto-regression and examines the effect of macroeconomic variables on forecast of bond market yield curve and return.The innovation points of this paper are as follow:1. This research is based on the special circumstance of China bond market.2. This paper investigates the forecasting effect of macro variables in market term-structure framework and bond portfolio return-risk framework respectively.3. This thesis uses a mean-variance model with inflation and monetary policy factors, together with latent variables to test China bond market.We find that the forecasting performance of a fundamental finance model improves when macro factors are incorporated, which also means that models with macro factors forecast better than models with only unobservable factors.