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Transmission of liquidity and credit risks in the Chinese bond market: Analysis based on joint modeling of multiple yield curves

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  • Lin, Mucai
  • Hong, Zhiwu
  • Su, Ge

Abstract

We propose a joint yield curve model to analyze the interactions among pricing factors for government and corporate bonds in China. Empirical results show that the explanatory power of liquidity and credit risks for corporate bond yields is rating- and maturity-dependent. Short-term interest rate shocks positively affect liquidity and low-rated credit risks, with strong risk contagion among credit risks. Although government bonds facilitate a “flight to liquidity” and provide a “safe haven” for investors, they suffer from liquidity and credit risks. Since 2015, credit risk has played an important role in the rise of systematic risks in Chinese bond market.

Suggested Citation

  • Lin, Mucai & Hong, Zhiwu & Su, Ge, 2024. "Transmission of liquidity and credit risks in the Chinese bond market: Analysis based on joint modeling of multiple yield curves," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 597-615.
    • Handle: RePEc:eee:reveco:v:91:y:2024:i:c:p:597-615
    DOI: 10.1016/j.iref.2024.01.017
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    More about this item

    Keywords

    Term structure model; Liquidity risk; Credit risk; Risk spillover;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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