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CHINA'S OFFICIAL RATES AND BOND YIELDS

Longzhen Fan and Anders Johansson ()
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Longzhen Fan: School of Management, Fudan University

No 2009-3, Working Paper Series from Stockholm School of Economics, China Economic Research Center

Abstract: Recent research shows that bond yields are influenced by monetary policy decisions. To learn how this works in an interest rate market that differs significantly from that of the U.S. and Europe, we model Chinese bond yields using the one-year deposit rate as a state variable. We also add the difference between the one-year interest rate and the one-year deposit rate as a factor. The model is developed in an affine framework and closed-form solutions are obtained. It is tested empirically and the results show that the new model characterizes the changing shape of the yield curve well. Incorporating the benchmark rate into the model thus helps us to match Chinese bond yields.

Keywords: China; deposit rate; bond yields; jump process; affine model (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cna, nep-mac, nep-mon and nep-tra
Date: 2009-03-01
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Journal Article: China's official rates and bond yields (2010) Downloads
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