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China’s official rates and bond yields

Authors
Journal
Journal of Banking & Finance
0378-4266
Publisher
Elsevier
Publication Date
Volume
34
Issue
5
Identifiers
DOI: 10.1016/j.jbankfin.2009.10.010
Keywords
  • China
  • Deposit Interest Rate
  • Bond Yields
  • Jump Process
  • Affine Model
Disciplines
  • Economics

Abstract

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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