chinese bond market: analysis of price information
DESCRIPTION
Chinese bond market: analysis of price information. Wang Jiang State University Higher School of Economics Moscow. Contents:. Chinese Bonds Market Overview. Zero-coupon yield curve used by China Government Securities Depository Trust & Cleaning Co., Ltd. - PowerPoint PPT PresentationTRANSCRIPT
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Chinese bond market: analysis of price information
Wang Jiang
State University Higher School of Economics Moscow
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Contents:
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• Chinese Bonds Market Overview
• Zero-coupon yield curve used by China Government Securities Depository Trust & Cleaning Co., Ltd
• Applying EFFAS-EBC methodology to Chinese bond market
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Market overview
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• About 3946 bonds with total worth 44 526,7 billion RMB issued since 1998
• Currently traded: 1912 bonds with outstanding amount 18 508 billion RMB
• About 1000 transactions a day with average daily turnaround about 160 billion RMB
• Bonds are traded at SSE, SZE, OTC and inter-bank markets
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Market Structure
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Market Structure
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Outstanding Amount
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1998
-12
1999
-12
2000
-12
2001
-12
2002
-12
2003
-12
2004
-12
2005
-12
2006
-12
2007
-12
2008
-12
2009
-12
2010
-040
2000400060008000
100001200014000160001800020000
Bill
ion
Source: http://www.chinabond.com.cn
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Present Instruments
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• Treasure Bonds (Ministry of Finance). All terms. Bullet redemption. Majority has coupons.
• Central Bank Bills (Peoples Bank of China). Very short and short term. Majority are discounted.
• Bonds Issued by Government-Owned BanksAll terms. Majority has coupons. Some have options.
• Corporate and Commercial Banks Bonds• Others
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Non-Governmental Credit Bonds
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2009 Bond Issuance Non-Governmental Credit Bonds
Source: Chinabond Source: Wind Info
Central Bank Bills
Policy Banks Bonds
T-Bonds
Corporate Bonds
Commercial Banks Bonds
Others
45.90%
13.50%
18.75%
18.23%
3.29%
0.33%
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Current position:
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• Chinese Bonds Market Overview
• Zero-coupon yield curve used by CGSDTC
• Applying EFFAS-EBC methodology to Chinese bond market
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History of Yield Curves Development in China
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Research Stage(1999-2001): The first treasury bond yield curve was created under the Discounted Cash Flow (DCF) method.
Development Stage (2002-2005): Four yield curves, i.e. Inter-bank Treasury Bond, Exchange Treasury Bond, Treasury Bond (compounded) and Floating interest rate Treasury Bond, and Indices for Treasury Bond (Inter-bank and Exchange) were worked out by CGSDTC. The method of quadratic polynomial was adapted at this stage .
Initial Application Stage (2006-now): CGSDTC has worked out a wide variety of yield curves and indices; the study and analysis for bond pricing are rapidly improved.
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ChinaBond Yield Curve
Inter-bankMarket
Treasury Bond
Floating/Fix Rate
Central Bank Bill
Policy Bank Bond
Floating/Fix Rate
Corporate Bond
Floating/Fix Rate
Commercial Bank Bond
Floating/Fix Rate
Commercial Paper ABS
Floating/Fix Rate
China Fixed-rate Treasury
Bond
ExchangeMarket
Treasury Bond
Corporate Bond
Chinabond yield curves structure
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CGSDTC Current Methodology
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• Data Filtering
• Expert and Historical Estimates
• Hermite Polynomial Fitting
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Data Sources
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• Deals Prices from OTC, Shanghai and Shenzhen Exchange markets
• Bid – Ask Quotes from Interbank market
• Market participants estimates
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Data Filtering
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In June 18, 2007 the data price contains T-bond 040007, YTM = 4.19, yield = 2.71%. The yield is much lower than the last working day (June 15, 2007). With the same YTM T-bond yield was 3.57% and 040007 is below the yield of 030007 (3.36%) with the YTM = 3.175 years. So, this data is anomaly.
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• Fix bonds maturity dates as grid nodes x = - YTM• Fit Hermite polynomial such that:a) Bond pricing equation holds
P – Bond price, A – Accumulative coupon income, F – Nominal bond price, t – Moments coupon payment,
b) Yield expert estimates are recovered
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Hermite Polynomial Fitting
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Result of Matlab simulation
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Current position:
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• Chinese Bonds Market Overview
• Zero-coupon yield curve used by CGSDTC
• Preliminary study of the Chinese bond market
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Data Sources
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• Daily trading results
• Bid – Ask Quotes from 8 banks:
Industrial and Commercial Bank of ChinaAgricultural Bank of ChinaBank of ChinaChina Construction BankBank of BeijingChina Merchants BankChina MinSheng BankBank of Nanjing
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Quotes co-Movement
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Bid-Ask Spread co-Movement
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Quotes: peculiarities
• Data contains errors: Bid > Ask• Quoted YTM corresponds to smth slightly less
than the Ask quote• Bid-Ask spread is far too wide• 4 banks quote all bonds, 4 banks quote only a
subset.
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“Best” inter-bank Bid-Ask spreads
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EFFAS-EBC meeting, June 2009 23
Quotes: Yield Curves
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Quotes: (Bid+Ask)/2
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Quotes: Summary
• Different banks use different quoting schemes: the way quotes move differs a lot
• Either quotes are non-committing or banks are isolated from each other: systematic arbitrage is present
• Bonds are likely to be quoted in groups by time to maturity.
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Prices: peculiarities
• Highly illiquid market• Prices may lie well outside Bid/Ask quotes• Similar bonds are frequently priced unlike
each other• No filtering helps since “unusual” prices tend
to repeat in time
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Number of Deals
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Turnover
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Price vs. Bid-Ask
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Prices: Yield curves
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More smoothing
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Prices: Summary
• Data from different sources are likely to be mixed
• Yield curves should be constructed from quotes
• Extremely illiquid market, price information is unreliable