Research On The Interest Rate Difference And Arbitrage Of China's Bond Repurchase Market

The bonds repurchase transaction is a sort of short-maturity collateralized financing instrument. In the several years, the bonds repo transaction has reached an enormous amount since it has many advantages over the immediate transaction. In this paper, I studied the related issues of bonds repurchase and the repo bonds market, such as the National Interbank Funding Center (CFETS), the Shanghai stock exchange, the Shenzhen stock exchange and other bond repurchase market. I examined the repo rate in the National Interbank Funding Center(CFETS) and the Shanghai stock exchange using daily data from Jan.1,2014 to Sep.30,2016, quantitatively studied the correlation, synchronization and spreads of repo rates in different repo markets, and tested the degree of deviation between couples of repurchases with the same maturities in different markets.This paper constructed four bonds-repo arbitrage strategies based on the repo rate spread of different repo markets, those are the 'Continuous bonds repo spreads arbitrage', the 'Single market bonds leveraged investment', the 'Cross market bonds leveraged investment' and the 'Bonds hedging portfolio using interest rate swaps'. I set up four arbitrage models of these bonds-repo arbitrage strategies, and built different portfolios for these arbitrage models. In this paper, there is an empirical analysis of the bonds-repo arbitrage strategies, and the analysis of the effect.This paper got the conclusions showing as follows:(1) First, species of the repo rate in the two bonds repurchase market has a strong correlation. Secondly, the fluctuations of the repo rate in the Shanghai stock exchange and the National Interbank Funding Center (CFETS) has a certain synchronization, the fluctuations of the repo rate in the Shanghai stock exchange is bigger than that in the National Interbank Funding Center (CFETS), meanwhile, the fluctuations of the repo rate in the two bonds repurchase market is closely related to the macroeconomic. Besides, the repo rate in the National Interbank Funding Center (CFETS) is lower than that in the Shanghai Stock Exchange. (2) Bonds investors can get risk-free arbitrage income by the'Continuous pledged repurchases' and the 'Continuous outright repurchases'. The spreads arbitrage income of the 'Continuous outright repurchases' will be converted to the fair value income of bonds. (3) With the increasing leverage ratio by bonds repurchases, the income and the liquidity risk of the bonds-repo arbitrage portfolios can be significantly improved, but the fluctuation of the profit (or loss) does not necessarily increase. (4) Cross market bond repurchase arbitrage, to a certain extent, will reduce the cost of the repurchase of financing. It can enhance the overall yield of the portfolio, but the risk of cross market arbitrage is complex. (5) The interest rate swap has a certain hedging effect on the spot of the bonds, but it can not fully hedge the risk. In order to hedge the interest rate risk of bonds investment more effectively, we need further innovations of financial derivatives.The research results of this paper will contribute to the analysis on bonds-repo arbitrage strategies, hedging of bonds and interest rate derivatives, and bonds repurchase market integration.