An Analysis Of The Causes Of China's Greenspan's Conundrum

In recent years, with China's development of financial innovation and financial deepening, the effectiveness of central bank's quantitative monetary policy has been gradually reduced. Priced monetary policy has been increasingly valued in the process of accelerating interest rate liberalization. Under the interest rate liberalization environment, the yield curve of national debt and the money market benchmark interest rates together make up a country's system of benchmark interest rates. At the present stage, however, China's yield curve of national debt is still not perfect. The low level and the insensitivity to short-term interest rate of long-term interest rate have been called China's Greenspan's Conundrums.China's Conundrums imply some important macroeconomic information and also reflect the Chinese bond market is not mature. From the point of the term structure formation mechanism, this paper analyses the main reasons of how to form the two phenomena of China's Conundrums.Firstly, this paper tests the expectation theory of China's term structure of interest rates in the interbank national debt market with the VAR approach. The test result rejects the expectation theory as a whole. At the far end of the yield curve, the risk premium plays an important role. However, the expected mechanism is still the main one to form the China's term structure. The function of expected mechanism did not change obviously after the second China's Conundrum appeared.Secondly, based on the independent-factor affine arbitrage-free class of Nelson-Siegel model, the long-term zero coupon interest rate of interbank national debt market is decomposed into the average of expected future short rates and the term premium. The result shows that the level of long-term zero coupon interest rate is mainly decided by the former, and the short-term trend is greatly influenced by the latter. The second China's Conundrum result from the flat average of expected future short rates and the downtrend of term premium.Based on the result of expected mechanism test and the result of risk premium estimation, this paper finally does a detailed analysis about the shape of China's Conundrums from the fundamentals, the policy and the funds. This paper believes that the good control of inflation, the low official benchmark interest rates, the strong demand from commercial banks and insurance companies at the long-term bond market and the small issuing scale of national debt result in the low long-term interest rate, and that the insensitivity of long-term interest rate to short-term one derives both from the causes of the first Conundrum and some other new factors, such as, an ageing population trends, the decline in economic growth expectation, and so on.This paper uses the existing research results for reference, brings some innovations, possessing the good theoretical significance and practice value.When testing the expectation theory of term structure, different from the past researches mostly focused on the money market interest rate system, this paper extends the maturity from 3 month to 20 years. In order to overcome the defect of single equation regression and cointegration method, this paper uses the modified VAR approach.When estimating the risk premium of long-term interest rate, this paper applies the independent-factor affine arbitrage-free class of Nelson-Siegel model with high degree of in-sample fitting and nice out-sample predictive performance to work. The independent-factor affine arbitrage-free class of Nelson-Siegel model takes the theoretically rigorous affine arbitrage-free model and Nelson-Siegel model full of economic meaning, becomes a tractable and practice valued one. The estimation of model parameters and state factors is finished in the state-space model with the Kalman-filter and maximum-likelihood methods.In the specific analysis of underlying reasons of China's Greenspan's Conundrums, this paper constructs an analysis framework consisting of formation mechanism and influence factors of term structure, takes the arbitrage situation or market segmentation into account.The research of China's Greenspan's Conundrums and the term structure is helpful to improve the yield curve, provides advice to some investors, and can also make sense to evaluating the effectiveness of interest rate money policy. The macroeconomic information included in the Conundrums reflects the government macro-control effect and shows the expected future economic operation situation.