US and Chinese yield curve responses to RMB exchange rate policy shocks: An analysis with the arbitrage-free Nelson-Siegel term structure model-Wang Yanan Institute for Studies in Economics (WISE), Xiamen University

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作者	Zhiwu Hong, Linlin Niu, Gengming Zeng
正文	Using a discrete-time version of the arbitrage-free Nelson–Siegel (AFNS) term structure model, we examine how yield curves in the US and China react to exchange rate policy shocks as China introduces gradual reforms to make its exchange rate regime more flexible. We characterize the specification of the discrete-time AFNS model, prove the uniqueness of the solution for model identification, perform specification analysis on its canonical form and detail the MCMC estimation method with a fast and reliable prior extraction step. Model decomposition reveals that in the U.S. yield responses, changes in risk premia for medium- to long-term yields dominate changes in yield expectation for short- to medium-term yields, indicating that the portfolio rebalancing effect due to varying risk perception is stronger than the signaling effect due to policy rate expectation. The results are helpful in diagnosing market sentiment and exchange rate risk pricing as China further internationalizes its currency. The methodology can be easily extended to study yield curve responses to other scenarios of policy shocks or regime changes.
JEL-Codes：	E43, F31
关键词：	arbitrage-free Nelson-Siegel term structure model; yield curve; macro-finance; exchange rate risk