Factors On The Credit Spread And Dynamic Analysis Of China Corporate Bond

Subprime mortgage crisis in2008is a typical case of credit risk mismanagement,the credit risk was underestimated by the financial institutions, the usage of highleveraged derivative products magnified the actual risk exposure, far more than theresults of any calculation of a theoretical model,“credit spread puzzle” once againbecome the focus of researchers at home and abroad. China’s corporate bond marketis in a rapid expansion period, in urgent need of credit risk pricing theory and marketstandards in line with the Chinese market, as the most important measure of credit risk,it is essential to look at the credit spread determinants and changes.In this paper, based on the China corporate bond market, corporate bond andsome related concept are defined and research area is identified firstly. Based on thedispersion of credit spread, propose the theoretical models and key assumptions.According to “credit spread puzzle theory”, make analysis on three levels: market risk,liquidity risk and default risk separately and build credit spread determinants of Chinacorporate bond indicator system. Lying on the term structure theory, verify Chinacorporate bond structure curve is downward shape, indicating that China corporatebond ratings generally too high and pricing errors exist. On the basic of structuremodel, the changes of company value will affect the credit spread change, overthrow“the bond market without risk” misunderstanding.Empirical analysis on China corporate bond credit spread determinants from bothstatic and dynamic aspects. Main conclusions from static analysis are as follows:①Quantile regression analysis is more capable than general multivariable regression ondetailed factors reflecting the credit spreads in different levels; Interest rate factor,liquidity and credit spreads negative correlation, liquidity risk has been integrated intoChina corporate bond market. Fluctuations in the stock market yields will lead torising credit spreads of corporate bonds, indicating that the stock market has been ableto influence the credit risk level in the bond market.②Using the fixed effects model,finds that individual differences between corporate bonds might be the explanation of"credit spread puzzle " of the new perspective. The result shows that the fixed effectsmodel can explain nearly47%of the credit spread, much higher than the structuralmodel. Confirmed the hypothesis that the number of the selected variables only has aslight improvement to explain the dynamics of the credit spread assumption,individual differences in sample or model factors are explaining the weak explanatorypower for models.③Results of Copula-GARCH model for credit spreadsdeterminants correlation analysis: China securities market presence "flight to safety"phenomenon, the stock market and the bond market co-move together, under certaincircumstances of investor assets, with the increasing risk of the stock market,investors will turn their funds to the corporate bond market which is relatively safe.Main conclusions from dynamics analysis:①Mean reversion model can better fit thecorporate bond credit spreads dynamic relationships.②Impulse response of creditspreads on major variables are studied: Interest rate, the liquidity factors makepositive pulse in credit spreads in first period; both reach the highest point in the second period. The stock market volatility impact on credit spreads in the short term.Stock market volatility and liquidity factors are more sensitive to changes in creditspreads. Establishing the ECM model between interest rate and credit spread: Interestrate and credit spread not only exists a long-term equilibrium relationship but also thechanges in credit spread affect interest rates as well, with a certain percentage to thenext period of credit spread.Based on these studies, combined with the actual development of Chinacorporate bond market, analyze the root causes of the existence of credit spread riskand default risk to provide solutions from controlling both credit risk and default riskto price corporate bond reasonably. Finally, due to the credit risk caused by thecontinually increasing credit spreads, trying to establish a following-up undertakingmechanism based on CDS proposed solutions to the credit risk management ofcorporate bond market.