On Pricing Difference Between China’s Enterprise Bonds And Corporate Bonds

This paper researched and studied the pricing mechanism and pricing difference between China’s enterprise bonds and corporate bonds, the two most important and actively trading credit bonds in China’s Security Exchange Markets, from three different aspects of informational efficiency, pricing determinants, and pricing model evaluation, respectively.The research on informational efficiency found that, the informational efficiency on both enterprise bonds and corporate bonds is rather low, but it’s better for the latter than that for the former, which implies that, to some extant, the future price of enterprise bonds and corporate bonds can be predicted by the historical data of various informational sources. Specifically,1) bond price historical data have the most significant predictive power:there are mean-reversion effects in both kinds of bonds.2) Historical risk-free interest rates also have significant predictive power, because there is some lag effect in its pricing into both kinds of bonds.3) Stock index return, although which cannot represent macroeconomic information, have some predictive power on bond prices:there is a trade-off between stock index return and bond return, a kind of so-called "seesaw effect".4) The stock return of the bond issuing company can have a little predictive power on bond return:maybe it’s due to a higher informational efficiency, or maybe it’s because the relation is weak between stock and bond prices.5) As the recently emerged kind of corporate bond, its informational efficiency is higher than enterprise bonds in all aspects.The research on pricing determinants found that, factors, including risk-free interest rate, credit risk, liquidity risk, and complication in pricing, will affect bond yield. Except risk-free interest rate, the most important determinant is credit risk, the second important is liquidity risk, and the effect of complication in pricing can be almostly ignored. In the various variables related to liquidity risk, bond age is the most important one. Newly issued bonds usually possess high liquidity, and the yield is low; seasoned bonds, on the other hand, usually have much lower liquidity, and the yield is higher. Besides all the factors above, there is another factor determining yield:the bond type. That is, if all the factors above were held the same and comparable, the yield of corporate bond will still be50-100basis points higher than that of enterprise bonds. This is a figure that is so significant that cannot be ignored, and deserves more attention from investors.The research on pricing model evaluation found that, the pricing result of enterprise bonds and corporate bonds using Merton model is rather unsatisfactory. The average absolute pricing error on enterprise bonds is3.33yuan, while the average absolute pricing error on corporate bonds is10.65yuan. The theoretical price is generally higher than market price. Further analysis on the source and determinant of pricing residual show that:1) the adjustment on risk-free interest rate by the Merton model is over-corrected.2) The adjustment on credit risk is generally failed:some are corrected in the wrong direction, some are failed to be corrected, and some are over-corrected.3) There is nearly no adjustment on liquidity risk.4) Although the Merton model reasonably adjusted the risk of complication in pricing, the overall positive effect is negligible.5) The important bond type factor is also not a bit adjusted.