The time-varying bond risk premia in China

Han Zhang, Bin Guo and Lanbiao Liu

Journal of Empirical Finance, 2022, vol. 65, issue C, 51-76

Abstract: Unlike many developed countries in which zero interest rate policies are widely adopted, there is still room for interest rate fluctuations in China. Nevertheless, the dynamics of bond yields, forward rates and risk premia still differ from the traditional understanding. This paper focuses on the Chinese treasury bonds. By OLS regressions, we find movements in the current forward rate fully reflect future bond risk premia, while other variables do not improve its performances, regardless of in- and out-of-sample predictions. This result is confirmed by a group of no-arbitrage dynamic term structure models. Moreover, the theoretical models reveal three important findings: 1. there are about 20% predictable variations in annual excess returns; 2. only the level factor risk is priced; 3. the candidate macroeconomic variables cannot contribute to the term premia structure.

Keywords: Bond risk premia; Chinese bond market; In- and out-of-sample predictions; Dynamic term structure model (search for similar items in EconPapers)
JEL-codes: C53 G12 G17 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:65:y:2022:i:c:p:51-76

DOI: 10.1016/j.jempfin.2021.11.004

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