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Flight to quality and implicit guarantee: Evidence from Chinese trust products

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  • Park, Heungju
  • Sohn, Sungbin

Abstract

We investigate the existence of alleged implicit guarantee in the primary market of Chinese trust products by testing whether flight-to-quality occurs towards trust products during financial turbulence. Since flight-to-quality occurs only towards safe assets, investors’ weak preference for trust products during turmoil implies the absence of guarantee. By jointly analyzing trust product issues and yield spreads, we test whether trust products are preferred particularly during financial turbulence. We find that market turmoil measured by larger credit spread overall induces more issues of trust products with greater yield spreads. Among more creditworthy products, however, we find more issues with smaller spreads when credit spread increases, indicating strong preference for these products. Such high preference during turmoil is observed only in the earlier sample period. The findings suggest that unlike media allegation, implicit guarantee only narrowly exists for selected trust products and is steadily weakening.

Suggested Citation

  • Park, Heungju & Sohn, Sungbin, 2021. "Flight to quality and implicit guarantee: Evidence from Chinese trust products," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 399-419.
    • Handle: RePEc:eee:reveco:v:75:y:2021:i:c:p:399-419
    DOI: 10.1016/j.iref.2021.04.026
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    More about this item

    Keywords

    Chinese shadow banking; Flight-to-quality; Implicit guarantee; Credit spread; Trust product;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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