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MS-VAR Eastimation Model for Term Structure of Interest Rate of Treasury Bonds and Cycle of Monetary Policy

Liu Huiming, Xia Qing, Zhang Huahua

Abstract


This paper has taken bank’s average interest rate for overnight loans as proxy variable of monetary policy, estimated the times series of level factor and negative of slope factor in Nelson-Siegel Model according to the data of Treasury Bond Market in Shanghai from October 2003 to March 2011. Considering the cycle of monetary policy, MS-VAR model has been utilized to study the impact on term structure of interest rate of treasury bonds due to the change of monetary policy. The empirical results have shown that, with respect to the tightening changes of monetary policy, during the period of easy monetary policy, level factor is more sensitive than negative of slope factor; during the period of tightened monetary policy, negative of slope factor is more sensitive than level factor.

Keywords


Cycle of monetary policy; Term structure of interest rate of treasury bonds; Markov-Switching VAR model

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