The Determinants of the Nondefaultable Spreads of Corporate Bonds: Evidence from China

This paper investigates the impact of multidimension liquidity, credit risk, and the interaction between liquidity and credit risk on corporate bond spreads based on a large transaction data set from July, 2006 to June, 2016, including the monthly data of 3716 bonds in China. Our main findings reveal that liquidity premiums are the main parts of corporate bond spreads. The interaction between liquidity and credit risk plays a significant role in determining corporate bond spreads. In addition, the differences between the interbank market and the exchange market have a significant impact on corporate bond spreads in normal period, and the interaction between liquidity and credit risk has an enhanced impact on corporate bond spreads during financial crisis. We also find that the interaction between liquidity and credit risk will increase with the increase of liquidity risk and credit risk and it is a time-varying dynamic process.

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Corporate Bond Pricing Model with Interaction between Liquidity and Credit Risk

Yang

2022

Complexity

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This study derives a liquidity and credit risk-adjusted capital asset pricing model and investigates the model using the data set in China's corporate bond market. Our research shows that the channels through which liquidity risk affects corporate bond return are individual bond liquidity risk, the interaction between individual bond liquidity risk and market liquidity risk. The channels through which credit risk affects corporate bond return are individual bond credit risk, the interaction between individual bond credit risk and market credit risk. The main channel through which the interaction between liquidity risk and credit risk affects corporate bond return is the interaction between individual bond liquidity risk and market credit risk. The model reveals the impact mechanism of individual risk and market risk on bond return and explains why the interaction between liquidity risk and credit risk affects bond pricing.

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The Determinants of the Nondefaultable Spreads of Corporate Bonds: Evidence from China

Cited by 3 publications

References 68 publications

Corporate bond liquidity and yield spreads: A review

Corporate bond liquidity and yield spreads: A review

Liquidity, Credit Risk, and Their Interaction on the Spreads in China’s Corporate Bond Market

Corporate Bond Pricing Model with Interaction between Liquidity and Credit Risk

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