Time and Frequency Structure of Causal Correlation Network in China Bond Market

TL;DR

This paper constructs a directed network of China bond interest rates using Granger causality, identifies key benchmark rates, and analyzes their evolution and information flow properties from 2008 to 2014.

Contribution

It develops a multi-variable Granger causality network approach to identify benchmark interest rates and their influence structure in China's bond market.

Findings

Short-term interest rates influence key rates more significantly.

Repo rates serve as benchmarks for short-term rates.

SHIBOR has become the main benchmark interest rate in China.

Abstract

There are more than eight hundred interest rates published in China bond market every day. Which are the benchmark interest rates that have broad influences on most interest rates is a major concern for economists. In this paper, multi-variable Granger causality test is developed and applied to construct a directed network of interest rates, whose important nodes, regarded as key interest rates, are evaluated with inverse Page Rank scores. The results indicate that some short-term interest rates have larger influences on the most key interest rates, while repo rates are the benchmark of short-term rates. It is also found that central bank bills'rates are in the core position of mid-term interest rates'network, and treasury bond rates are leading the long-term bonds rates. The evolution of benchmark interest rates is also studied from 2008 to 2014, and it's found that SHIBOR has generally become the benchmark interest rate in China. In the frequency domain we detect the properties of information flows between interest rates and the result confirms the existence of market segmentation in China bond market.