Estimation, Predictability And Monetary Policy Implication Of Interest Rate Term Structure In China

The research on interest rate term structure is an ongoing, long-term process, because in the micro-financial sector it is the basis for pricing derivatives. Previous researches focused on the interest rate term structure’s form hypotheses, estimation, and the dynamic change process, the main feature is concentrated within the financial sector to discuss the characteristics of its own interest rate term structure and implied meaning. However, different ideas still exist in these fields, which prove to be flourishing, vibrant scene.In the new century, some scholars have started to pay attention to the relationship between the term structure of interest rates and the external economic environment. They think that the term structure contains a wealth of information related to real economic activity, not only about the current monetary policy and fiscal policy information, but also the expected future economic activity, real interest rates and inflation information. However, how to compute the correlation between them? Which degree does the correlation reaches? What’re the roles of the various factors? These questions have not been answered well. Further, for this rapidly transforming Chinese market, whether the interest rate term structure can help to understand the formulation of monetary policy? These are some very interesting questions, but also where the purpose of this study liesTo answer these questions, this article was divided into three aspects:(1) China’s bond market evaluation of the term structure of interest rates; (2) whether the term structure plays a certain forward-looking role; (3)the implied monetary policy meaning of term structure. The internal logic of these three issues reflected in the relationship:firstly, China’s bond market does not exist a large number of zero-coupon bond trading, so there is not interest rate term structure data readily available, which need to be estimated using the trading information on interest-bearing debt is; secondly, the biggest advantage of term structure of interest rates is that it is the information obtained through the interpretation of market transactions, it reflect information of the implied market investors’ expectations of future interest rate movements, logically speaking, it should have more forward view than the traditional statistical indicators on the current economic situation. However, no man knows what’s the exactly measuring way of the forward-looking ability; finally, if the term structure of interest rates have some predictive power, then the monetary authorities could use it as a monetary policy making reference.On the aspect of the estimation of interest rate term structure, this paper did not compare the results of several commonly used models and judge which model is more suitable for China market. But this does not mean that this article’s choice of estimation methods is random and irresponsible. We mainly consider two reasons:firstly, the estimation of interest rate term structure is not the core of this paper; secondly, the existing researches on the issue have a large literature, they find that Nielson-Siegel and Svensson extended model can better fit the Chinese data. In this section, we selected Svensson’s estimation, and focus on events from the perspective of financial and economic analysis were carried out to test the validity of its estimates, including:the interest rate curve shape characteristics and economic implications, the period of interest rate movements and their economic implications, the length of spread and monetary policy. The results showed that the term structure of interest rates is upward sloping shape, the mainstream of shape, and duration of interest rate changes in interest rates could reflect the rapid economic growth, inflationary pressures increased, the exchange rate appreciation, monetary policy ineffective, and the characteristics of the financial crisis. Here, this paper seeks to prove the estimation results of the term structure is effective, which would be further analyzed later to provide a guarantee.On the aspect of the own predictive power of the term structure, based on guidelines of the financial asset pricing "law of one price", this paper transform the spot rates into forward rates an first, and then establish a regression of the forward rates on the spot rates, distinguishing the results with different times in the prediction equation. Evidence found that on the Chinese market, the predicting period is a month forward, in other words, institutional investors on the market and monetary authorities could expect to roughly predict the movements of the interest one month forward, which also reflect the economic environment changes. On the aspect of interest rate term structure’s monetary policy implications, after setting the control variables of other economic variables, this paper used VAR model to compute the term structure’s reflection of monetary policy shocks, including money supply targets and interest rate ones. In this paper, by analyzing data from nearly a decade, the results showed a rapid response intermediate target interest rate, which means the advantages of short cycle. We believe that with the introduction of such mechanisms such as Shibor, this advantage will become more apparent.Finally, the paper also analyzed the role of real economic activity, inflation and other macroeconomic factors in the interest rate term structure dynamics. Study found that in the present stage, the interest rate term structure is probably a reflection of macroeconomic factors more than 30%, of which rapid economic growth stands from 15% to 23%, and monetary policy stand from 8% to 13%, price level changes stands from 3% to 7%.Compared with other studies on the term structure of interest rates, innovations of this paper lies in:(1) managed to interpret the interest rate term structure from the angle of economic event shocks, understanding the underlying economic meaning, rather than simply give a list of operation results; (2) tried to quantify the predictive ability of interest rate term structure; (3) adopted the macro-economic factors into the term structure of interest rates and focused on the role of monetary policy.