Chinese Bond Market: A Need for Sound Estimation of Term Structure Interest Rates

Submitted: Jul 13, 2013; Accepted: Aug 15, 2013; Published: Aug 25, 2013 Abstract: Prior to Asian economic crisis in 1997, bond markets in lots of Asian countries were small and relatively undeveloped. The Asian financial crisis demonstrated the need for a broader range of funding sources, which led the governments of Asian countries to embark on a major program to develop a local bond market. China avoided this crisis due to the special regulation and the strict rules for assets movement in and out of the country. Nowadays the Chinese local bond market is the most rapidly growing in Asia. In this article we discuss than the zero-coupon yield curve estimation method used by the Chinese government, apply it to bond trading data, compare it with the most popular methods and with a novel non-parametric zero-coupon yield curve estimation method developed by the authors.