The Study, Based On Macroeconomic Factors, Interest Rate Models

This paper tests the expectation hypothesis theory and risk premium hypothesis theory and provides a systematic framework to analyze the characteristics of risks and returns in China bond market. We find that the expectation hypothesis holds in the short end of yield curve and with the increase of duration, the risk premium hypothesis and market segmentation hypothesis theory impact jointly. We analyzed the bond risk premium of different kinds of durations and concludes that the absolute return and risk adjusted return of 3-year bonds is higher then the return of other maturities. Aware of the seasonality of risk premium, We also concludes that long-term bond investment can bring higher return if we can identify the turning point of risk premium. We also set up some term structure models including financial factors and macroeconomic factors to capture the behavior of interest rate. Impulse response functions are also employed to depict macroeconomic variables and monetary variables effects on interest rates. Based on the demonstrated risk-return relationship and yield curve theories above, we finally build up a trading strategy to provide some guidance for active portfolio management.