Forecasting the Government Yield Curve in China: A Cyclical Reverting Mean Approach

Songzhuo Li () and Fang Zhang ()
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Songzhuo Li: School of Economics and Finance, Queen Mary University of London, UK.
Fang Zhang: School of Finance, Shanghai Lixin University of Accounting and Finance. Address: No. 995 Shangchuan Road, Pudong, Shanghai, 201209, China. Shanghai Collaborative Innovation Center of Yangtze River Delta Technology Innovation Industry Financial Service,

Journal for Economic Forecasting, 2023, issue 1, 78-90

Abstract: In this paper, we allow the Chinese interest rate to move cyclically and introduce an extension of Vasicek (1977) model to estimate Chinese yield curve in response to the cyclical movements of interest rates. In this model, the constant long-run reverting mean is replaced by a Fourier series to capture the cyclical behaviour of instantaneous rates. We use the daily inter-bank zero-coupon yields data ranging from 2006 to 2015. The extension model is found to perform significantly better than the benchmark in both in-sample fitting and out-of-sample forecasting.

Keywords: term structure of interest rates; Fourier series; cyclical movement; interest rates forecasting; Chinese yields curve (search for similar items in EconPapers)
JEL-codes: C31 E32 E43 F37 (search for similar items in EconPapers)
Date: 2023
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