China's official rates and bond yields
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.
Year of publication: |
2010
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Authors: | Fan, Longzhen ; Johansson, Anders C. |
Published in: |
Journal of Banking & Finance. - Elsevier, ISSN 0378-4266. - Vol. 34.2010, 5, p. 996-1007
|
Publisher: |
Elsevier |
Keywords: | China Deposit interest rate Bond yields Jump process Affine model |
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