Research On Credit Risk's Influence On Credit Spread In China's Bond Market

The analysis of corporate bond's credit spread is of more and more significance.Recent research illustrates that the change of credit spread accouts for macroeconomicfactor, liquidity, as well as credit risk, although there is still some arguments. Moreand more research illustrates that rating should be considered when analyzing creditrisk.There is some challenge in analyzing crdite spread in China's bond mark?because there is few real default events in China's bond market, which means nodefault rate data is available?so choosing suitable index which can delegate credit riskin China's bond market is a challenging job.According to questionnaires?this paper finds that the investors are very cautiousabout credit risk in China's bond market?they could change their portfolio if creditevent is predicted. So?credit risk's influence is not only on the bond itself, but also onthe whole bond market.This paper aims to illustrate how much credit risk is priced in credit spread. Asno default risk data is available?credit risk in China's bond market is been delegatedfor downgrade of credit rating. The result reveals that?while controlling CPI, IP, R007,bond exchange rate etc., the remaining credit risk is significant to credit spread inChina's corporate bond market?and the influence is more significant to lower ratingbonds, especially for the AA and the lower grade corporate bonds. Despite of howmuch credit risk is priced in credit spread?this paper also illustrates how long willcredit risk act in credit spread.As credit risk is growing, the supervisor of China's bond market shouldguarantee the fair market environment?in which risk premium is suitable.