Estimation On Term Structure Of Interest Rate Of Government Bonds In China

With the deepening of the financial reform and speeding up the pace of market-oriented interest rate, bond trading and bond markets of our country have been highly development and fully growth.The rate of the national debt as the risk-free interest rate and the term structure of bond yields of different maturities which the significance of study them are summed up in two aspects:Form the theoretical aspects:first,it provides a solid theoretical basis to pricing the financial asset,such as government bonds, corporate bonds and their derivatives pricing; second, it can help to promote the further improvement of China’s capital market,and through accurate estimates of the term structure of interest rate, can provide a reasonable market price information for the government to reduce market arbitrage opportunities;third,it will provide benchmark interest rate support to the process of market-oriented interest rate.From a practical aspect:first, it can better measure and control the interest rate risk in our financial markets;second, it will find unreasonable asset pricing and risk-free arbitrage in the market,then we can greatly improve the efficiency of our financial markets and promote the further development,through the discover of the irrationality of the market asset pricing, risk-free arbitrage.Also it help the government to issue and manage government bonds, and the correct implementation of the monetary policy to adjust interest rates, an accurate evaluation of the effects of economic policy, it can provide an important basis of the above areas.However,with increasing the degree of participation bond markets and the acceleration of the process of market-oriented, the term structure of the bond market in China as well as government bonds are still need to be perfected and improved.On the structure of the article, the total is divided into five parts. The first part is the introduction, which introduce the significance of the research and background, as well as the purposes of research; The second part describes the status quo of China’s government bond market; The third part involves related concepts as well as the introduction of the model; The forth part is the empirical part; The fifth part is the conclusions and recommendations.In our study,we start from the estimation method about term structure of interest rate,conditioned on liquidity and information asymmetry factors,according to the basic idea of Diebold&Li (2006) which examine the forecasting performances of term structure.This study examines,and provides a rationale for incorporating,liquidity in estimating term structure. Forecasting performance can be greatly enhanced when conditioning on trading liquidity. We selected NSS model to fitting term structure,because it improves the flexibility of the model to calculate the short-term bond prices and the fitting of the complex shape of the term structure. The daily volume of government bonds as a liquidity proxy,and to measure information asymmetry,we adopt Burlacu et al.(2007) proposed Asymmetric Information Measure(AIM).Estimating the term structure of interest rates, liquidity is substituted into the form of a weighted plan, the estimated model parameters and to predict the price of government bonds. During the sample period, the the fluidity weighted price and weighted prediction error between the comparative analysis, the results of our study also confirmed the added liquidity term structure fitting significantly improve the prediction performance.The more liquidity for different maturities of bonds, such as7-year government bonds, its predicted price should be less than the actual price, its suppression the forecast prices; Similarly, the liquidity contained the information content of an impact on the price which the model depicts.Empirical research in this article, we will divided entire sample period into two periods that are in-the-sample and out-of-sample to analysis predictive performance respectively. In-the-sample, we do sample national debt every day forecast price error analysis; out-of-sample,samples bonds the prediction step is5-day,10-day,20-day and30-day forecast price error comparison. Predicted longer the step size, the smaller of the AIM, it means that the greater the degree of information asymmetry, especially during the on-the-run bonds, the smaller the degree of information asymmetry. We find that the incorporation of liquidity improves forecasting performance significantly and provides a justification for its implementation, and its results are consistent with predictions of underlying theoretical models.Forecasted errors produced by liquidity-weighted fitting process are smaller in absolute term, and also in variance, than those generated by an unweighted method. Analysis on the degree of informational asymmetry also leads us to find that liquidity-based estimation helps reducing it. The longer the forecasting window is, the more pronounced these effects become. More liquid issues enjoy more rapid reduction of informational asymmetry.To the extent that implied information asymmetry falls with higher liquidity, our argument is that using trading liquidity as a reference, market participants are utilizing rationally all possible information.Forecasts are therefore made with more accuracy and consistency.The innovation of this paper is that, in the term structure of the estimated government bonds, considering the bond liquidity and factors of asymmetric information, empirical evidence to be able to improve the prediction performance.