Abstract: Using a two-factor volatility component model——DCC-MIDAS model, this paper examines the linkage between China's inter-bank bond market and interest rate swap market. The empirical results are as follows. The return spillover and the volatility spillovers (both long and short-term volatility components) are bi-directional between the two markets. The dynamic conditional correlation is negative and there is a trend to increase gradually. The long-term volatility components of the two markets are affected by the volatilities of the common macroeconomic variables. Macroeconomic uncertainty has a positive effect on the long-term volatility of the two markets and has a greater impact on the inter-bank bond market than the interest rate swap market.

Keywords: inter-bank bond market; interest rate swap market; volatility decomposition; GARCH-MIDAS; DCC-MIDAS