Study on Treasury’s Interest Rate Risk between Exchange and Interbank Bond Markets Based on Parametric Model
|Keywords||Exchange Inter-bank market Parametric model Interest rate risk PCA|
With China’s interest rate market to promote the supply and demand of funds in financial markets are becoming the most important factor in the changes in interest rates. Due to changes in interest rates more frequently, how to model the term structure of interest rates, and extract the risk factors of interest rate volatility become more and more important. Due to the differences on trading mechanism and the main body of investment, exchange bond market and inter-bank bond market formed two separate subjects. This article reviews the term structure of interest rates theory, using bond data of exchange and inter-bank market, fitting the term structure of interest rates on the two markets based on Nelson-Siegel (NS) model and Svensson (SV) model. Based on the estimated time series data of spot interest rates, the author used principal component analysis (PCA) method to extract risk factors of interest rate volatility, explained the meaning of each factor and compared them with U.S. treasury market. Then discuss the directions to consummate our bond market.Based on the above ideas, this paper includes three conclusions.First of all, the article select the original bond data of Shanghai stock exchange bond market and inter-bank bond market on January6,2012to December3,2013. Then fit the term structure of interest rates on the two markets based on NS model and SV model. Through theoretical analysis and empirical comparison, the author found that SV model is more suited to fit the treasury’s term structure of interest rates.In addition, based on the estimated time series data of spot interest rates according to SV model, the author used principal component analysis (PCA) method to extract risk factors of interest rate volatility, explained the meaning of each factor and compared them with U.S. treasury market. According to the previous theoretical study, the vast majority of risk factors of interest rate volatility can be explained by the level factor, the slope factor and the curvature factor. We have found that the bond interest rate risk of exchange and inter-bank markets need to be covered by four factors. The variance contribution rate of the fourth factor of the exchange and inter-bank market has reached2.9849%and2.3868%, indicating that the unexplained part of the interest rate risk is still a large proportion. From the point of market segmentation, the author believed that the trading mechanism, the reaction rate, bond issuance and risk hedging mechanism contribute a lot to that.Furthermore, we have found that compared to the findings of Tang Ge Rong, Zhu Feng (2003) the three-factor model of the two markets has improved a lot and the gap between them has narrowed a lot. In contrast, the slope factor and the curvature factor decomposed from the interest rate volatility of inter-bank market explain the similar changes with the U.S. treasury market in the ratio of the total variance. It may be related to that inter-bank market’s trading mechanism and the main body of the investment are quite similar with the foreign markets.