Modeling the Dynamics of Chinese Spot Interest Rates
Yongmiao Hong, Hai Lin, Shouyang Wang
#002118 20131014 (published)
Using the daily data of Chinese 7-day repo rates from January 1, 1997 to December 31, 2008, this paper tests a variety of popular spot rate models, including single-factor diffusion, GARCH, Markov regime-switching and jump-diffusion models. We document that Chinese spot rates are subject to both market forces and administrative forces. GARCH, regime-switching and jump-diffusion models capture some important features of the dynamics of Chinese spot rates, but all models under study are overwhelmingly rejected. We further explore possible sources of model misspecification using diagnostic tests.
JEL-Codes: E4; C5; G1
Keywords: Spot rate models; Term structure of interest rates; Market segmentation; Nonparametric specification tests

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