1 / 35

Chinese Bond Market Challenges

Chinese Bond Market Challenges. Sergey N. Smirnov State University Higher School of Economics Moscow. 1. 3. 2. Contents :. Chinese Bonds Market Overview. Zero-coupon yield curve used by CGSDTC. Applying EFFAS-EBC methodology to Chinese Bonds Market. Market scale.

gunda
Download Presentation

Chinese Bond Market Challenges

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chinese Bond Market Challenges Sergey N. Smirnov State University Higher School of Economics Moscow

  2. 1 3 2 Contents: Chinese Bonds Market Overview Zero-coupon yield curve used by CGSDTC Applying EFFAS-EBC methodology to Chinese Bonds Market EFFAS-EBC meeting, June 2009

  3. Market scale • About 3000 bonds with total worth 34 704,6 billion RMB issued since 1998 • Currently traded: 1385 bonds with outstanding amount 16 600 billion RMB (rmb usd rate: 1 Chinese yuan = 0.15 U.S. Dollars) • About 1000 transactions a day with average daily turnaround about 150 billion RMB • Bonds are traded at Shanghai and Shenzhen exchanges, OTC and inter-bank markets EFFAS-EBC meeting, June 2009

  4. Chinese Bonds Market Structure Source: ChinaBond EFFAS-EBC meeting, June 2009

  5. Chinese Bonds Market Structure Source: ChinaBond EFFAS-EBC meeting, June 2009

  6. Market Infrastructure • The primary market of bond issuance is largely completed through syndication. • Governmental bonds were mostly underwritten by the four stated-owned banks while other commercial banks and securities companies play active role in forming syndicate to market financial and corporate bonds. • Most of bonds are held by banks, insurance companies, securities firms, and corporations. Mutual funds hold a relatively small fraction of the total outstanding bonds. EFFAS-EBC meeting, June 2009

  7. Instruments Present • 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. • Government owned Banks All terms. Majority has coupons. Some have options. • Corporate and Commercial Banks Bonds • Others EFFAS-EBC meeting, June 2009

  8. Outstanding Amount EFFAS-EBC meeting, June 2009

  9. 1 3 2 Current position: Chinese Bonds Market Overview Zero-coupon yield curve used by CGSDTC Applying EFFAS-EBC methodology to Chinese Bonds Market EFFAS-EBC meeting, June 2009

  10. History of Zero-Coupon Yield Curves Development in China • Research (1999-2001). With aid of Reuters was developed first yield curve for Treasure bonds • Prototypes (2002-2005). Chinese development of 4 yield curves for Treasure bonds using information from different markets • Exploitation and Modification (2006 - Present). New methods are developed and yield curves are constructed for different types of bonds. EFFAS-EBC meeting, June 2009

  11. CGSDTC Methodology • Data Filtering • Expert and Historical Estimates • Hermite Polynomial Fitting EFFAS-EBC meeting, June 2009

  12. Data Sources • Deals Prices from Interbank, OTC and Shanghai Exchange markets • Bid-Ask Quotes from Interbank market • Market Participants estimates EFFAS-EBC meeting, June 2009

  13. Data Filtering Visual comparison with historical yield curves, not historical market data EFFAS-EBC meeting, June 2009

  14. Expert and Historical Estimates If too many entries are filtered out the data is augmented with expert estimates or historical values EFFAS-EBC meeting, June 2009

  15. Hermite Polynomial Fitting • Fix bonds maturity dates as grid nodes • Fit Hermite polynomial such that: a) Bond pricing equation holds b) Yield expert estimates are recovered EFFAS-EBC meeting, June 2009

  16. Controversial results EFFAS-EBC meeting, June 2009

  17. 1 3 2 Current position: Chinese Bonds Market Overview Zero-coupon yield curve used by CGSDTC Applying EFFAS-EBC methodology to Chinese Bonds Market EFFAS-EBC meeting, June 2009

  18. Available data Chinabond has kindly supplied us with the following data: • Daily trading results. • Daily OTC Bid/Ask quotes from 8 banks. EFFAS-EBC meeting, June 2009

  19. Quotes co-Movement EFFAS-EBC meeting, June 2009

  20. Bid-Ask Spread co-Movement EFFAS-EBC meeting, June 2009

  21. Quotes: peculiarities • Data contains errors: Bid > Ask • Data is inconsistent: Bids>Askk for several days in a row • 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. EFFAS-EBC meeting, June 2009

  22. “Best” inter-bank Bid-Ask spreads EFFAS-EBC meeting, June 2009

  23. Quotes: Yield Curves EFFAS-EBC meeting, June 2009

  24. Quotes: Forward Rates EFFAS-EBC meeting, June 2009

  25. Quotes: (Bid+Ask)/2 EFFAS-EBC meeting, June 2009

  26. 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 • Nobody uses spot forward rates • Bonds are likely to be quoted in groups by time to maturity (duration is not used) EFFAS-EBC meeting, June 2009

  27. 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 EFFAS-EBC meeting, June 2009

  28. Number of Deals EFFAS-EBC meeting, June 2009

  29. Turnover EFFAS-EBC meeting, June 2009

  30. Price vs. Bid-Ask EFFAS-EBC meeting, June 2009

  31. Prices: Yield curves EFFAS-EBC meeting, June 2009

  32. More smoothing EFFAS-EBC meeting, June 2009

  33. High-Coupon Effect? • Hypothesis: Chinese traders like high coupons (bonds with high coupons are valued higher). • Testing: corr(coupon size, spread) = 10% EFFAS-EBC meeting, June 2009

  34. Visual Coupons EFFAS-EBC meeting, June 2009

  35. 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 EFFAS-EBC meeting, June 2009

More Related