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China's official rates and bond yields

  • Fan, Longzhen
  • Johansson, Anders C.

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.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 5 (May)
Pages: 996-1007

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:5:p:996-1007
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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