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China's official rates and bond yields

Longzhen Fan and Anders Johansson ()

Journal of Banking & Finance, 2010, vol. 34, issue 5, 996-1007

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.

Keywords: China; Deposit; interest; rate; Bond; yields; Jump; process; Affine; model (search for similar items in EconPapers)
Date: 2010
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Working Paper: CHINA'S OFFICIAL RATES AND BOND YIELDS (2009) Downloads
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Handle: RePEc:eee:jbfina:v:34:y:2010:i:5:p:996-1007