chinese bond market: analysis of price information
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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
Chinese bond market: analysis of price information
Wang Jiang
State University Higher School of Economics Moscow
Contents:
2
• 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
Market overview
3
• 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
4
Market Structure
Market Structure
5
Outstanding Amount
6
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
Present Instruments
7
• 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
Non-Governmental Credit Bonds
8
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%
Current position:
9
• Chinese Bonds Market Overview
• Zero-coupon yield curve used by CGSDTC
• Applying EFFAS-EBC methodology to Chinese bond market
History of Yield Curves Development in China
10
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.
11
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
CGSDTC Current Methodology
12
• Data Filtering
• Expert and Historical Estimates
• Hermite Polynomial Fitting
Data Sources
13
• Deals Prices from OTC, Shanghai and Shenzhen Exchange markets
• Bid – Ask Quotes from Interbank market
• Market participants estimates
Data Filtering
14
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.
• 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
15
Hermite Polynomial Fitting
Result of Matlab simulation
16
Current position:
17
• Chinese Bonds Market Overview
• Zero-coupon yield curve used by CGSDTC
• Preliminary study of the Chinese bond market
Data Sources
18
• 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
19
Quotes co-Movement
20
Bid-Ask Spread co-Movement
21
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.
22
“Best” inter-bank Bid-Ask spreads
EFFAS-EBC meeting, June 2009 23
Quotes: Yield Curves
24
Quotes: (Bid+Ask)/2
25
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.
26
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
27
Number of Deals
28
Turnover
29
Price vs. Bid-Ask
30
Prices: Yield curves
31
More smoothing
32
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