A VAR-based factor decomposition to the term structure of treasury bonds

Mengxue Zhao, Dejun Xie*, David A. Edwards, Yujian Liu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


This paper analyses the dimensions of the term structure and explains their associations with macroeconomic parameters that foretell financial crises. Five prominent financial economic indicators were found, collectively explaining the dynamics of bond yields. Data from China's bond market from 2007 to 2019 were used to calibrate our model and hypothesis. The VAR model was adopted to explore in what direction and to what extent the early warning indicators of financial crises may effect changes in the term structure. Given its high complexity and the irregularity of its occurrence in different economies, it is usually a challenging task to quantitatively model financial crises. This challenge has been handled by an indirect approach introduced in the current study, linking the original limited sample size problem to a VAR-based model with abundant time series data. The findings provide an implementable scheme that may be used to design an early warning system of financial crises.

Original languageEnglish
Pages (from-to)585-613
Number of pages29
JournalInternational Journal of Monetary Economics and Finance
Issue number6
Publication statusPublished - 17 Jan 2023


  • VAR model
  • bond yield curve
  • financial crisis
  • term structure of interest rates
  • variance decomposition


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