Fitting Chinese Benchmark Yield Curve Based On The Svensson Model

In the field of Macro-control policy,pricing of financial instruments and portfolio risk management the significance of yield curve has long been recognized by the theoretical and economic management departments.In China as a result of long-established Interest Rate Control Policy,theoretical research in related fields is short of suitable atmosphere and substantive demand exists hysteresis.The current practice has to go in front of theory,although modern financial operation system and mechanism adjusting to comprehensive market economy is far from perfect and needs to be improved,the market-oriented reform of interest rate has been accelerated,while the scale of financial instruments for trading is increasingly expanding and financial derivatives market is also surging,gigantic aggregate economic volume guarantee the irreversible trend of China’s integrating into the development of the global economy and attracting the world’s attention,establishing a benchmark yield curve to provide authoritative fair source of information for market participants and economic management department is urgent.Meanwhile,the demand for market liquidity and information about the term structure in turn provides motivation for the development of the market.Firstly,in respect of finding a suitable data source to build a benchmark yield curve we retrospect ups and downs of Chinese bond market in the past 30 years thoroughly and carry out a thorough contract investigation on the sophisticated interest rate system.According to the criterions of being risk-free,existing ample liquidity and sufficient capacity,available continuous real-time information,the full coverage of period,reflecting supply and demand of fund which are in accordance with the experience of coming form the related research at home and abroad,we identified the rate of China inter-bank market fixed interest bearing bonds as suitable the benchmark interest rate.The painstaking work of data reduction ensured both high precision and data consistency.Then we use NSS model which is widely accepted and has got repeated verification to estimate the benchmark yield curve,the logic of which was applying nonlinear regression to estimate model parameters which reduce the sum of squared pricing error of the theoretical price and actual price.Empirical research concluded that goodness of fit and the overall performance of the constructed curve have to be in conformity with the requirements of the follow-up study,which also reflects the trend of changes in interest rates obviously and has no obvious lumpy.We explore static statistical features of the rate of key periods in respect of this curve,which has to be in conformity with the basic economic facts.Then we used PCA to study dynamic characteristic and the conclusion was that the explanatory power for level and slope factors affecting spot yield curve movement were 79.856%and10.694%,the level of which matched with the counterpart of Europe maturity bonds markets;and because of the special periodic characteristics of the bond market and deformity stage of risk game mechanism,the curvature factor affects faintly.We believe that with the breadth and depth of Debt Capital Markets in China improving,the explanatory power for the curvature factor will experience a convergence with foreign experience and regularization.Finally,according to bottlenecks of establishing market "anchor" status found in the establishment of "benchmark yield curve",we suggest improving market maker system,making a strong sound and orderly spread DVP settlement,optimizing and enrich the structure of investors,nurturing the diversified bond futures index derivatives to treasurys spot yield curve,Inter bank bond market and stock exchange bond market having interoperability and coordination interaction,then we grip the opportunity to popularize the benchmark yield curve application terminal scenarios.