The Real Interest Rate, Inflation Expectation And Inflation Risk Premium In Chinese Financial Market

The nominal interest rate term structure contains potentially a great deal of information, especially the nominal interest rate term structure implied by government bonds. Government bond, which is issued by a national government, is generally considered to have no risk of default, In addition, it enjoys large trading volume and good liquidity, therefore the current level, shape of the nominal interest rate term structure of it and the information implied in the term structure are of great importance for the participants of bond market. In the real world, real interest rates provide the evidence for investment decision-making and monetary policy-making, inflation expectation is the key determinant of nations’ economic and social stability and the management of inflation expectation is a significant matter, while inflation risk premia is a crucial indicator of the operation of financial market, so it is of great theoretical and realistic significance to decompose the nominal interest rate term structure into real interest rate, expected inflation and inflation risk premia term structure.The short-term interest rate is the core variable in finance, but it is also sensitive to the shocks from the macroeconomic fundamentals, moreover, interest rate term structure affects the operation of macroeconomy, so the relationship of interest rate term structure and macroeconomic variables has been researched as a popular topic.There are mainly three independent approaches: latent-factor models, reduced macro-finance models and structural macro-finance models, but latent-factor models always end up with the identification of the latent factors’ macroeconomic implication, although the macroeconomic variables are added to all kinds of reduced macro-finance models, actrually they are choosed and ordered at will, the structural macro-finance models in the existing literature start with different macroeconomic models directly and model the macroeconomy and interest rate term structure jointly, but they may be prone to misspecification. In order to overcome above existing problems, this paper combines the approach to the latent-factor model of term structure with the approach to the macro-finance modelfor the first time. First, this paper model the bonds yields with the latent-factor modle, which is based on an gaussian affine arbitrage-free term structure model. In order to establish the term structure model without macroecnomic variables, we need to deal with the nominal yields and their difference by principal compinents analysis, the analysis shows that the first three principal components are able to explain virtually all the variation in nominal yields, then estimate the latent-factor model by maximum likelihood, using the kalman filter to computer the log-likelihood function, and after that the relationship of the three factors and macroecomnomic variables is studied from the theoretical and practical views, it turns out that the components of the short-term interest rate in the latent-factor model can be identified as the equilibrium real interest rate in taylor rule, long-run inflation expectation, monetary policy adjustment and monetary policy shock, and the inflation rate and output gap should be the choosed macroeconomic variables in the term structure model.Sencond, on the basis of the above analysis, this paper sets up the structural macro-fiance model and the macroeconomy was specificated by the hybird new Keynesian model. The identification problem of the structural macro-fiance model make it difficult to be estimated, after identification of the model by using the Sims algorithm, then estimate it by maximum likelihood, the results indicate that:long-term inflation expectation is affected by the current inflation rate and the last months’ inflation expectation significantly; The central bank’s sensitivity of response to inflation rate is higher than the output gap, even so, the response coefficiencts is still very low; Inflation expectation has a greater impact on the current inflation rate relative to the last two periods’ inflation rate while the lagged output has a greater impact on the current output gap relative to expected output gap;The real interest rate gap has a little negtive effect on current output gap; Unlike the estimation of new keynesian model fully based on the macroeconomic information,the estimated results show that the central bank not only react to inflation rate and output gap, but also to the persistent monetary policy shock.Finally, on the basis of the structural macro-finance model, this paper shows hownominal interest rates is decomposed into real interest rates, expected inflation and inflation risk premia, the results shows that: the loose monetary policy has been operated for many years to support the economic growth, so the real yields at any maturity in chinese bond market are negative during the period between 2006 and2015; Real yield curve has been flat to slightly upward sloping on average; 1-year inflation expectation is sensitive to the economic shocks and the monetary adjustment, and has the same dynamic trend with the inflation rate; Long-term inflation expectation is steady; The granger causuality test of inflation rate and inflation expectation at any maturity shows that: short-term inflation expectations are influenced by the inflation rate, medium and long-term inflation expectation are influenced by other macroeconomic variables, the inflation rate do not react to the short-term inflation expectation, but is affected by the medium and long-term inflation expectation, so the monetary policy should pay attention to management in advance and focus on the management of inflation expectation to make sure of the effectiveness and perspectiveness; The inflation risk premium varies with time and have the same dynamic trend, but the extent of change is obviously different,because of the time-varying premium, the Fisher hypothesis does not hold in the interbank bond market, but the extended Fisher hypothesis holds.The interest rate term structure model can be used for the pricing of the bonds and the investment analysis, futhermore it has the advantage of providing monthly estimates of expected inflation at any horizon and the inflation expectation is more timely and more realistic than the survey inflation expectation, as a better reference for monetary policy-maker, it increses the effectiveness and perspectiveness of policy-making. As a significant part of nominal interest rate term structure, the inflation risk premium extracted from the model can be used to evaluate the financing costs of government and it also play an important role in the pricing of inflation derivatives.