China’s official rates and bond yields |
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Authors: | Longzhen Fan Anders C. Johansson |
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Affiliation: | 1. School of Management, Fudan University, 200433 Shanghai, China;2. Stockholm School of Economics, Box 6501, 11383 Stockholm, Sweden |
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Abstract: | Recent research shows that bond yields are influenced by monetary policy decisions. To learn how this works in a bond market that differs significantly from those in the US and Europe, we model Chinese bond yields using the one-year deposit interest rate as a state variable. We also include the spread between the one-year market interest rate and the one-year deposit interest rate as another factor. The model is developed in an affine framework and closed-form solutions are obtained. We then test the model empirically with a Markov Chain Monte Carlo simulation procedure. The results show that the new model that incorporates the official rate in China characterizes the changing shape of the yield curve well. |
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Keywords: | E43 E44 E52 E58 G15 |
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