China's Bond Trading Cross-market Arbitrage Research

Ever since its establishment of more than 20 years ago, China's treasure bonds market has been experiencing fast growth. However, there still exist problems, which hinder its further development. The focus of mainstream academic is on the discussion about the relation of treasure bonds and development of economy. While the research from treasure market itself, which is a framework or mechanism to realize the trade, is not emphasized enough. Nowadays the most important issue that puzzle all economic principal part is the partition between exchange market and interbank market. Each of which has its own product types, transaction principals, transaction mechanisms and market regulator. The foresaid four issues create the segment of the two markets. The two markets can't have coordinated development, and sometimes even develop in the opposite direction, which seriously hamper the growth of a healthy treasure bond market. The partition of the treasure market will hinder the its development, which has many problems: the two markets can't have coordinated development, greatly reduced the liquidity of the treasure market, increased financing costs, while the central bank in the treasure market through open marker operations, the two markets can't t reflect the consensus simultaneously, effect the impact of open market operations.At the same time, the reformation of China's treasure bonds market is boosted too slowly to meet the fierce demand of all actors to capital market including treasure bonds market as the development of market economy. But the issuance of some cross-market products improves the situation. The topic of this paper is to analyze the linkage and make empirical research on inter-market arbitrage from the difference in pricing between interbank market and exchange market, to make empirical research on inter-market arbitrage, and present the background knowledge about the trusteeship and settlement system of treasure bonds. This paper analyzes transaction time lag and transaction costs on different mode of arbitrage and uses the traditional economics tool, i.e. cost-return analysis method to research the feasibility of inter-market arbitrage and the characteristics of distribution of its return rate. This paper finds that the arbitrage return is closely relative to arbitrage period and this kind of relation is also time varying. It depends on the trend of bonds price to a great extent. And accordingly find out the characteristic and variety of market mechanism in the process of transformation of treasure market institution, which help establish a unified and efficient treasure bond market in our country.