Term Structure Of Interest Rates In China And It’s Macro Economy Influence Factors

Interest rate is a very important variable in economics and finance.It decides the price of capital. The fluctuation of interest rate, not only it reflect the relationship between capital supply and demand, but also affect each part of macro economy. The term structure of interest rate is a function between risk-free interest rate and maturity. It’s the most fundamental and important concept in Fixed-income theory. The term structure laid the foundation for pricing financial derivatives. Right now, the process of China’s market-oriented interest rate enters phase of assault fortified positions, it is urge to find the standard market-oriented interest rate term structure. The standard interest rate term structure will improve the development of financial derivatives, and laid a solid foundation for innovation and stability of financial system. This paper studies the term structure of interbank national bond market in China, it also discuss the rationality of treating it as standard market-oriented interest rate term structure. We find our work is theoretically and physically vital.At first, we did some review for the developing process of term structure theory, and introduce the static estimation and dynamic model of term structure. Then we introduce some macro-economic variables. We discuss exactly how they affect term structure. In the empirical part of our paper, we use VAR-ATSM model which obtains three latent factors to fit the term structure of China’s interbank national bond price. We measure the effects of fitting by out-of-sample prediction, and use Nelson-Siegel model to give the three latent factors economic meaning. Then we found VAR model using macro-economy variables and each of three latent factors. Based on recent work, we use impulse response and variance decomposition to find how macro-economy variables affect term structure. The results showed that, the real economy and inflation have a significant positive influence on the level factor, but monetary policy’s influence on level factor is not significant. The slope factor of term structure mainly affected by monetary policy. Loose monetary policy increases the slope of term structure, make it steeper. Real economy and monetary policy have little influence on the curvature factor of term structure. At the same time, the rise of inflation changed our expectation for future inflation, thus affect the curvature factor of term structure positively. At last, we present some relevant policy recommendation.