An Empirical Research On The Dynamic Interactions Between Macro Economy And Term Structrue

Term structure provides the fundamental for the pricing of financial assets. It is closely related with the macro economy and is an important tool for the transmission of monetary policy. As People’s Bank of China is pushing forward the reform of interest rate liberalization, the acquaintance of term structure becomes more important. This paper reviews the literatures about the theory of term structure, the dynamic fitting method and the relationship between term structure and macro economy. It also introduces the research progress of domestic literature.We base on the dynamic Nelson Siegel model, which is firstly proposed by Diebold and Li in2006. We form the state space system and use the Kalman Filter to optimize the target function. The result shows that the model can fit the yield curve well. The three latent factors are highly persistent especially for the level factor. Cross-factor dynamics appear not so important. Only Ct-1shows significant effect on St. For the different parts of the yield curve, the dynamic Nelson Siegel model can fit the middle part of the yield curve better. We also use the three factors to make prediction.It shows good predictive ability. But as the prediction period becomes longer, the predictive ability will also decrease.We then describe the joint dynamic interactions of yield curve factors and observable macroeconomic variables by vector auto regression model. We choose four groups of macroeconomic variables linked closely with term structure. They are prices, market liquidity, economic growth and security markets. The result shows mutual interaction only exists between yield curve and money supply. That means term structure is not only affected by money supply M2, but can also reflect the change of M2in advance. For most macroeconomic variables, the interactions with yield curve are only one-way relationship. It contains the information of inflation, economic growth and liquidity, such as CPI, industrial added value and interbank offered rate. Term structure can be an indicator of macro economy. Besides, term structure can reflect the price information in advance not lag behind price, which reflects the efficiency of bond market. The latent factors of term structure are affected by Shanghai composite index, PMI and US dollar index. However, the supply of Treasury bonds does not show any significant relationship with term structure.Then we put the macroeconomic variables into the dynamic Nelson Siegel model. The results show that both M2and PMI have positive effects on the three factors of term structure. M2can help to improve the fitting effect of whole yield curve, but the improvement of fitting effect for PMI only shows on the long term. By this way, we improve the fitting ability of dynamic Nelson Siegel model and also confirm the relationship between term structure and term structure.