Interest Rate Term Structure Empirical Analysis

Treasury bond market plays an important role on Chinese financial market.Interest rate is the key to the study of treasury bond. The level of interest rate hasgreat influence on the yield of investor and the financial cost of issuing bond. Theterm structure of interest rate determines the choice of maturity of bonds and theinvestors' preference. The interest rate of Treasury Bond has meaning far beyond itsprimary function as an indicator of the yield of bond. What is more important that thereform on the interest rate of treasury bond will influent the whole economic system.The interest rate of treasury bond as an indicator of the basic interest rate has becomethe useful tool for macroeconomic policy implement. Integrating the term structure ofinterest rate is the basic element of establishing a healthy financial market. Thediversified term structure benefit not only to the financing of fiscal fund but also tothe open market operation, the liquidity management of commercial bank, thefinancial market transaction and the initiation of the base rate. The interest rate as wellas the shape and violability of yield curve of treasury bond are of considerable valueto the development of the bond market and even the whole financial market. Studyingon term structure of interest rate play an important role in the designing and pricing offinancial derivatives, financial risk controlling and establishing investment portfolio.As a conclusion, studying on the term structure on interest rate has not only theorymeaning but also does great help to the practice in fixed income security market.At the second part, this thesis is to study the yield curve upon the basis of termstructure theories: Unbiased Expection Theory, Liquidity Preference Theory, MarketSegmentation Theory and Preferred Habit Theory. And then the author makes a briefintroduction on the study achievement on term structure of interest rate by domesticeconomists. We can find that the study on the term structure of interest rate isrelatively limited and these studies are too simple to the real market situation. Theyjust use leering regression to simulate the yield that is an imprecise mean. First, theauthor used static experiential analysis method to simulate the yield curve of treasurybond systematically by Bruce Tuckma multinomial model. Second, the PrincipalComponents Analysis is used to study the volatility characteristic of the yield curvegenerated from the yield curve data issued by Shanghai Security Exchange. Based onabove demonstration, this thesis analyzes the characteristics and the embeddedproblems of the curve and looks into the bond market to find out the roots of theseproblems. At last, according to the potential influential factors, the author putsforward his own suggestions on several aspects, such as the term structure of treasurybond, the efficiency of the treasury bond market, the rational investment manner oftreasure bond investor and the issuing method of treasury bond.At the third part, the thesis gets two conclusion: the first one is that the shape ofthe yield curve of Chinese treasury bonds is relative flat, which means that theefficiency of China's treasury bond market are weaker than the developed countries'.The second one is that the efficiency of China's treasury bond market is nowimproving, which can be demonstrated by the Principal Components Analysis that theshift mode of the yield curve is nearly same as the mature bond markets.At the forth part, the thesis gives several suggestions on China's treasury bondmarket. First, we should increase the supply of treasury bonds and issuing long termtreasury bond, which has life more than 20 years, so as to guarantee the accuracy ofyield curve. Second, we should encourage the innovation on financial market andfinancial instrument so as to improve the efficiency of China's financial market. Third,we should place more emphasis on training investors to help them conduct rationalinvestment. Last, we should reform the treasury bond issuing method. For example,we can use the American Bid method when issuing long term treasury bonds. If allthese suggestions have been implemented, the efficiency of China' treasury bondmarket could be largely improved.