An Empirical Research On China Corporate Bond Yield Spreads

In August 2007, the Commission issued corporate bonds issued pilot method. Chinese corporate bonds in real sense began issuing and listing. Since then, China’s corporate bonds mushroomed and rapid developed. At end of the third quarter of 2012, the scale of corporate bonds reached 400 billion yuan which had becomed an important channel for listed companies to fice fund. However, domestic papers almost have done nothing about corporate bonds which didn’t match rapid growing market. Choosing the corporate bonds as the topic of study, the paper is believed to be good for future domestic theoretical research on corporate bons and practice.The main difference between corporate bonds and government bonds is that corporate bonds have default risk while treasury bonds will not default in general. The structure model, originated by Merton (1974) and developed by numbers of scholars followed, is main method to model the credit risk of corporate bonds. Based on structure model, the study focus on the pricing mechanism of China’s corporate bonds and how risk factors affecting credit spreads.Firstly, using quarterly data of Chinese corporate bonds, this paper studies the the pricing power of three traditional structured models.The results show thatthe structural modelson the whole overestimatecorporate bond prices which means structural models underestimate corporate bond yield spreads. Besides, Leland and Toft (1996) model has a less pricing error than Merton (1974) model and Longstaff and Schwardz (1995) model. Also, the paper,using t test and OLS regression method, investigated what factors affecting the pricing error ofstructuremodels.The results show that leverage and assets volatilityhave significant impact on pricing error.Secondly, using the Chinese corporate bonds quarterly data, this paper focus on the pricing ability of three structure models. Specifically, the study compared the pricing error of the structural models between different credit rating bonds. In addition, this article also investigated the impact of the ficial crisis on pricing errors of structure models. Finally, the paper investigated which factors caused the pricing error using t test and empirical regressing method.Thirdly, using monthly panel data, the paper did the empirical study to examine how structural model risk factors influence the credit spreads. Bedsides, the article also considered what the relationship between liquidity factor, accounting information, market risks and credit spreads was. The empirical results show that when the leverage increase, risk free rate decrease, corporate bond spreads tend to rise. This is consistent with the expectation of structural model. While the volatility of stock return is not significant. Credit spreads are significantly positive with turnover and zero-ratio of corporate bonds. The company’s accounting factors, in particularly the size of the company’s assets, have a significant impact on the credit spreads.Finally, the paper studied the impact of economic the state variables on corporate bond spreads after controlling for the firm specific factors. First, using structured vector auto regression (SVAR) variance decomposition method, the study analyzed variance composition of credit spreads in future. Then, the thesis used pool regression model to investigate how economic state variables affecting the credit spreads. The empirical results show that on the whole, Chinese corporate bond spreads is against the economic cycle. And the growth rate of the money supply and market interest rates are the main macro-factors to determine corporate bond spreads.