The Risk Premium of Treasury Bonds in China

Xiaowei Wu

doi:10.4236/jmf.2016.61015

Abstract

This paper studied the macroeconomic and the term structure of treasury bonds in the Shanghai Stock Exchange Market. Different from previous studies, we used a group of 122 observed macroeconomic data to construct our model’s macro factor. Therefore the macro factor contained more information than previous studies in predicting the excess return of Treasury bond. Based on the Kalman-Filter estimation, the results show that the macro factor’s risk was compensated through the level factor and slope factor, especially the level factor. Further, based on the decomposition of the yield curve into expected future short rate part and risk premium part, we find that there is some correlation between the variability of the risk premium and monetary policy to some extent.

Highlights

Since the appearance of Ang and Piazzesi [1], a flood of research has tempted to study the connection between bond price and macroeconomic
The main contribution of this paper is that it contains more information about the macroeconomic and its impact on the term structure and the risk premium of treasury bonds, especially in a transferring economic like China when there might exist some kind of restrictions in the markets
The results shows that the model risk premium of the macro factor is compensate through the level factor

Summary

Introduction

Since the appearance of Ang and Piazzesi [1], a flood of research has tempted to study the connection between bond price and macroeconomic Since their introduction of the macro variable into the Gaussian Dynamic Term Structure Models, this leads to an explosion of macro-finance research. There seem a lot of macro variables which can be used as factors in Macro Dynamic Term Structure Model, but it seems that they don’t contain so much macro information predicting the excess return. The main contribution of this paper is that it contains more information about the macroeconomic and its impact on the term structure and the risk premium of treasury bonds, especially in a transferring economic like China when there might exist some kind of restrictions in the markets

The Model

Empirical Results

Conclusions