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Forecasting the Government Yield Curve in China: A Cyclical Reverting Mean Approach

Author

Listed:
  • Songzhuo LI

    (School of Economics and Finance, Queen Mary University of London, UK.)

  • Fang ZHANG

    (School of Finance, Shanghai Lixin University of Accounting and Finance. Address: No. 995 Shangchuan Road, Pudong, Shanghai, 201209, China. Shanghai Collaborative Innovation Center of Yangtze River Delta Technology Innovation Industry Financial Service,)

Abstract

In this paper, we allow the Chinese interest rate to move cyclically and introduce an extension of Vasicek (1977) model to estimate Chinese yield curve in response to the cyclical movements of interest rates. In this model, the constant long-run reverting mean is replaced by a Fourier series to capture the cyclical behaviour of instantaneous rates. We use the daily inter-bank zero-coupon yields data ranging from 2006 to 2015. The extension model is found to perform significantly better than the benchmark in both in-sample fitting and out-of-sample forecasting.

Suggested Citation

  • Songzhuo LI & Fang ZHANG, 2023. "Forecasting the Government Yield Curve in China: A Cyclical Reverting Mean Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 78-90, March.
    • Handle: RePEc:rjr:romjef:v::y:2023:i:1:p:78-90
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    References listed on IDEAS

    as
    1. Moreno, Manuel & Novales, Alfonso & Platania, Federico, 2018. "A term structure model under cyclical fluctuations in interest rates," Economic Modelling, Elsevier, vol. 72(C), pages 140-150.
    2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    3. Roma, Antonio & Torous, Walter, 1997. "The Cyclical Behavior of Interest Rates," Journal of Finance, American Finance Association, vol. 52(4), pages 1519-1542, September.
    4. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    5. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    term structure of interest rates; Fourier series; cyclical movement; interest rates forecasting; Chinese yields curve;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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