Online from: 2011
Subject Area: Accounting and Finance
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|Title:||On credit spread change of Chinese corporate bonds: credit risk or asset allocation effect?|
|Author(s):||Changfeng Cui, (Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China), Hailong Liu, (Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China), Yi Zhang, (School of Economics, Shanghai University of Finance and Economics, Shanghai, China)|
|Citation:||Changfeng Cui, Hailong Liu, Yi Zhang, (2013) "On credit spread change of Chinese corporate bonds: credit risk or asset allocation effect?", China Finance Review International, Vol. 3 Iss: 3, pp.250 - 263|
|Keywords:||Asset allocation effect, Assets, Bonds, China, Credit, Credit risk effect, Credit spread change, Markov regime switching model|
|Article type:||Research paper|
|DOI:||10.1108/CFRI-02-2012-0020 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
|Acknowledgements:||Thanks for the research support of National Nature Science Foundation of China (Fund No. 71273169).|
Purpose – Credit spread change is a key issue for investors to earn the excess return from corporate bonds. Generally, there are two kinds of different effects that support the changing of credit spread: asset allocation effect and credit risk change effect. The existing literature based on US data supports credit spread change is driven by credit risk change; however, this issue based on Chinese market data has not been investigated clearly. This paper seeks to address this issue.
Design/methodology/approach – The authors adopt Markov regime switching model to investigate the changing mode of the credit spread in the Chinese bond market. They select three kinds of variables: the credit risk variables, the asset allocation variables and the liquidity condition variables. With ML estimators, the authors can find the changing mode and further they study the relationship between the regime switching and some observed variables, such as macro economy variables and turnover of stock market.
Findings – The authors find it is driven by asset allocation effect in most time and by credit risk change only in shorter period. Empirical results show that the switching of dominance from one effect to another isn't closely related with macro-economy variables, but related with the turnover of stock market.
Practical implications – These results indicate that in China the credit risk of corporate bonds is relatively low and the corporate bonds are still auxiliary asset for investors.
Originality/value – In this paper, the authors have the following two contributions: first, they discuss the asset allocation effect in the Chinese bond market and introduce the stock market variables and bank credit variable to describe the asset allocation effect; second, based on Chinese bond market data, they find different findings from the existing literature about US and European bond markets, showing that the changing of credit spread is mostly related with asset allocation effect but not credit risk change.
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