Term structure of interest rates and stock market cycle: Empirical analysis based on MS-VAR model

This paper made an estimation for three parameters (level factor, slope factor, curvature factor) time series with Nelson-Siegel model and data from Treasury bond market in China from 2003 to 2008. Supposing the evolvement of the vector of time series of three parameters is governed by a certain latent variable ruled by 2-regime Markov-switching, Markov-Switching VAR model is built which could reflect the influence of the latent variable on the term structure of interest rate of Treasury bond. Finally the empirical test was conducted and the results showed that the latent variable is the stock market cycle and the evolvement of the term structure of interest rate of Treasury bond is governed by the switching of the stock market cycle.