Term Structure

  • 详情 FOMC Announcements and Secular Declines in Global Interest Rates
    Secular declines in global sovereign yields are concentrated in short event windows around U.S. monetary policy announcement dates. Cumulative changes in sovereign yields during FOMC announcement dates contain critical information for explaining the persistent variations in the yields, predicting future yields and excess bond returns, and determining interest rate expectations and term premia. We build a dynamic term structure model with shifting endpoints to study the effects of U.S. monetary policy on world yield curves. Our findings highlight that U.S. monetary policy drives the secular declines in global interest rates by reducing expected interest rates.
  • 详情 Monetary Policy and the Long-Run Trend of Treasury Yields
    Secular declines in U.S. Treasury yields are concentrated in three-day windows around FOMC announcement dates. Cumulative yield changes during these short windows explain the secular decline in yields. This factor contains essential information on excess bond returns and outperforms well-known proxies for interest rate trends in prediction regressions. We estimate a dynamic term structure model to explain these empirical facts. The model suggests that the secular declines in Treasury yields over the past three decades were primarily due to reductions in expected interest rates, mostly during the FOMC announcement windows.
  • 详情 Forecasting the Dynamic Change of Term Structure for Chinese Commodity Futures: an h-step Functional Autoregressive (1) Model
    Although China has the largest trading volume of commodity futures, limited studies have been devoted to the term structure of Chinese commodity futures. This paper takes the tools in functional data analysis to understand the term structure of commodity futures and forecast its dynamic changes at both short and long horizons. Functional ANOVA has been applied to examine the calendar e_ect of term structure in level and _nd the seasonality in the commodity futures of coking coal and polypropylene. We use an h-step functional autoregressive (1) model to forecast the dynamic change of term structure. Comparing with native predictor, in-sample and out-of-sample forecasting performance indicate that additional forecasting power is gained by using the functional autoregressive structure. Although the dynamic change at short horizons is not predictable, the forecasts appear much accurate at long horizons due to the stronger temporal dependence. The predictive factor method has a better in-sample _tting, but it cannot outperform the estimated kernel method for out-of-sample testing, except for 1-quarter-ahead forecasting.
    Studies of the dynamics of bond risk premia that do not account for the corresponding dynamics of bond risk are hard to interpret. We propose a new approach to modeling bond risk and risk premia. For each of the US and China, we reduce the government bond market to its first two principal-component bond-factor portfolios. For each bond-factor portfolio, we estimate the joint dynamics of its volatility and Sharpe ratio as functions of yield curve variables, and of VIX in the US. We have three main findings.(1) There is an important second factor in bond risk premia. (2) Time variation in bond return volatility is as important as time variation in bond Sharpe ratios. (3) Bond risk premia are solely compensation for bond risk, as no-arbitrage theory predicts. Our approach also allows us to document interesting cyclical and secular time-variation in the term structure of bond risk premia in both the US and China.
  • 详情 The Joint Dynamics and Risk Transmission between Chengtou Bond Spreads and Treasury Yields in China
    China's local government debt financing grows rapidly featuring surging chengtou bond issuance and risk exposure since the global financial crisis in 2008. The accumulation of local government debt poses systemic risks to China's fiscal and financial systems. Using weekly data from 2009 to 2014, this paper studies the joint dynamics and risk transmission mechanism between chengtou bond spreads and treasury yields under the framework of the extended no-arbitrage Nelson-Seigel term structure model, which guarantees the no-arbitrage relationship between treasury yields of different maturities. The results show that the chengtou bonds indeed exhibit considerable local risks and can lead to systemic risk of the treasury bonds, such that the treasury yields have significant component of risk premium due to chengtou risk. On the other hand, as the safest asset in China at present, the treasury yields with short-to-medium maturities decrease as a result of the “fly-to-safety" effect when the chengtou risk increases. Meanwhile, the dynamics of chengtou bond spreads reflect the market-oriented risk pricing by investors on credit and liquidity risks under limitations of the government implicit guarantee. Under this condition, it is the right timing to reasonably standardize and institutionalize the local government bond market with transparent market mechanism.
  • 详情 Do Regular and Leveraged VIX Exchange-traded Products Track the VIX Index?
    VIX Exchange-traded Products (ETPs) provide tracking on the return of a constant-maturity VIX futures index, instead of the uninvestable VIX spot index. In this paper, we develop a comprehensive framework to analyze the behaviors and fundamental drivers of the tracking performance of regular and leveraged VIX ETPs. In this framework, naïve investors in VIX ETPs expect to achieve the ETP’s leverage ratio multiplied by the VIX return during their holding period, but the actual ETP return can deviate dramatically from this naïve expected return due to four components of return deviation. The index substitution deviation is shown to be the primary driver of the bull (inverse) VIX ETPs’ return erosion (enhancement), which can be explained by the negative roll-yield as a result of the contango term structure of VIX futures. For leveraged VIX ETPs over multiple holding days, the compounding deviation due to the “constant-leverage trap” can be sizable. In addition, the NAV deviation due to expense ratio and fund management issues is negative, and the inefficiency deviation doesn’t accumulate over long holding periods due to the creation/redemption feature. Our return deviation framework can be generalized to other ETPs tracking indices that are either uninvestable or unrealistic to replicate.
  • 详情 A Puzzle of Counter-Credit-Risk Corporate Yield Spreads in China’s Corporate Bond Market
    In this paper, using a set of zero yield curve data of China’s government bonds and credit bonds, along with China’s aggregate credit risk measures, and macroeconomic variables from 2006 to 2013, we document a puzzle of counter-credit-risk corporate yield spreads. We interpret this puzzle as a symptom of the immaturity of China’s credit bond market, which reveals a distorted pricing mechanism latent in the fundamental of this market. As by-products of our analysis, we also find interesting results about relations between corporate yield spreads and interest rates as well as risk premia and the stock index, and these results are somewhat attributed to this puzzle.
  • 详情 Understanding Chinese Bond Yields and their Role in Monetary Policy
    China’s financial prices are informative enough for the PBC to introduce a monetary policy framework centered around interest rates. While bond yields are not fully efficient—reflecting regulation, liquidity, and segmentation—we find they contain considerable information about the state of the economy as well as evidence of an emerging transmission channel: changes in PBC rates influence the structure of Treasury, financial, and corporate bond yield curves, which are then associated with changes in growth and inflation. Coporate spreads are also a leading indicator of growth and inflation. While further liberalization will strengthen both efficiency and transmission, several necessary elements to move towards indirect monetary policy are already in place.
  • 详情 The Term Structure of Interest Rates and Its Forecast Ability of Macro Economy in China
    The forecast ability of term structure is tested in this paper with the data of interbank treasury yield curve of Chinabond. The results show that there are positive relationships between term structure and the changes of future macro economy, i.e. GDP, consumption, production and inflation, which is similar with the studies of the developed countries. The term structure can predict the mid-term economic growth well, even considering the effects of monetary policy and another leading indicator. With the regression results, the out-of-sample predictions show a lower and decreasing growth rate in the next two years, implying greater challenges to the policy-makers.
  • 详情 The Effects of Policy Reversals: A Natural Experiment from Financial Market Liberalization in China
    What are the effects of policy reversals which were initiated by the US bureaucracy in response to the 2008 global financial crisis? Answering this question is challenging because US capital markets are relatively mature and policy reversals are far and in between in recent years. Specifically, the challenges include the one-time nature of these US policy reversals, the confounding effects of many programs targeting interrelated segments of the capital markets at the same time as well as possible endogeneity issues. China, on the other hand, offers a natural experiment to study the effects of policy reversals. In the last three decades, the Chinese government has initiated many policy changes to liberalize the capital markets and some of these have been reversed several times. Using hand-collected data of policy reversals targeting the Chinese stock markets from 1994 through 2009, we are able to address the first two challenges. To resolve any endogeneity issue, we focus on the impact of such policy reversals (targeted at the Chinese stock markets) on the Chinese repo markets, which trade market-driven interest rates. We find that the Chinese policy reversals are indeed effective in reducing the term spread, the volatility of the interest rate, and the volatility of the term spread. Our results suggest that the policy risk is systematically priced in financial securities, implying that policy makers can rely on financial market indicators to objectively evaluate their policy decisions.