Static Analysis On The Term Structure Of Interest Rates And Factors Of Government Bonds

Interest rates have been employed as extremely important factors of economic system operation in various economic theories. The term structure of interest rates refers to the relation between the yield to maturity and the term to maturity from a certain point, which is the foundation for the financial pricing and hedging. As the interest rate liberalization process approaches, especially the release of the floor of loan interest rate in2013, interest rates are determined by the demand and supply of funds increasingly. Acting as one of the benchmark interest rates, the term structure of interest rate of government bonds deserves more academic attention.This paper briefly introduces several basic concepts and the static theories on interest rate term, and according to the past history and current condition of the bond market in China, modified NSS Model is chosen as the suitable model for fitting of the term structure of inter-bank market interest rates. Furthermore, by utilizing the principal component analysis method, three representative factors are abstracted to demonstrating the term structure of interest rates. Moreover, this paper applies four macroeconomic variables which are industrial production index in china, exchange rate (RMB/USD), monetary supply M2and consumer price index in china. This study makes use of monthly data taken from January2007to December2012, ended up with samples amounting to72. If co-integration relationship between variables exists, we adopt the error correction model; otherwise, granger causality test model is applied. Results show that:(1) the modified NSS model is able to explain the term structure of interest rates of government bonds effectively and efficiently;(2) according to the VEC model, both the central bank monetary policy and the price index are the causes of government bond yield variables. The change of exchange rate react on monetary policy firstly, both are the consequences of government bond yield, instead of the causes. The measure reveals far less effective government bond yield with industrial production index in china, money supply M2etc.