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Modeling the Dynamics of Chinese Spot Interest Rates

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  • Yongmiao Hong
  • Hai Lin
  • Shouyang Wang

Abstract

Understanding the dynamics of spot interest rates is important for derivatives pricing, risk management, interest rate liberalization, and macroeconomic control. Based on a daily data of Chinese 7-day repo rates from July 22, 1996 to August 26, 2004, we estimate and test a variety of popular spot rate models, including single factor diffusion, GARCH, Markov regime switching and jump diffusion models, to examine how well they can capture the dynamics of the Chinese spot rates and whether the dynamics of the Chinese spot rates has similar features to that of the U.S. spot rates. A robust M-estimation method and a robust Hellinger metric-based specification test are used to alleviate the impact of frequent extreme observations in the Chinese interest rate data, which are mainly due to IPO. We document that GARCH, regime switching and jump diffusion models can capture some important features of the dynamics of the Chinese spot rates, but all models under study are overwhelmingly rejected. We further explore possible sources of model misspecification using some diagnostic tests. This provides useful information for future improvement on modeling the dynamics of the Chinese spot rates.

Suggested Citation

  • Yongmiao Hong & Hai Lin & Shouyang Wang, 2013. "Modeling the Dynamics of Chinese Spot Interest Rates," WISE Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
  • Handle: RePEc:wyi:wpaper:001998
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    References listed on IDEAS

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    Cited by:

    1. Ka-Fai Li & Cho-Hoi Hui & Tsz-Kin Chung, 2012. "Determinants and Dynamics of Price Disparity in Onshore and Offshore Renminbi Forward Exchange Rate Markets," Working Papers 242012, Hong Kong Institute for Monetary Research.
    2. Löchel, H. & Packham, N. & Walisch, F., 2016. "Determinants of the onshore and offshore Chinese government yield curves," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 77-93.
    3. Sun, Rongrong, 2018. "Monetary Policy Announcements and Market Interest Rates’ Response: Evidence from China," MPRA Paper 87703, University Library of Munich, Germany.
    4. Li, Shaoyu & Zheng, Tingguo, 2017. "Modeling spot rate using a realized stochastic volatility model with level effect and dynamic drift☆," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 200-221.
    5. Golmohammadi, Davood & Radnia, Naeimeh, 2016. "Prediction modeling and pattern recognition for patient readmission," International Journal of Production Economics, Elsevier, vol. 171(P1), pages 151-161.
    6. Loechel, Horst & Packham, Natalie & Walisch, Fabian, 2013. "Determinants of the onshore and offshore Chinese Government yield curves," Frankfurt School - Working Paper Series 202, Frankfurt School of Finance and Management.
    7. Nowman, Khalid Ben, 2010. "Modelling the UK and Euro yield curves using the Generalized Vasicek model: Empirical results from panel data for one and two factor models," International Review of Financial Analysis, Elsevier, vol. 19(5), pages 334-341, December.

    More about this item

    Keywords

    Generalized residuals; Robust specification tests; Robust M-estimation; Spot rate;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets

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