Research On The Impact Of Bond Default Risk On Credit Spreads

With the in-depth advancement of China's supply-side reform,economic growth has entered a new normal stage,and the smooth transformation of the economy requires a wellestablished direct financing market.In recent years,the bond market,which is a direct financing channel for enterprises,has developed rapidly.Its product system has been continuously diversified and its market system has become more multi-layered.However,the basic system of China's capital market is not yet perfect,and the ability to respond to and deal with risks needs to be strengthened.The systemic risks accumulated in the capital market are gradually exposed,especially the default risk of bonds.The default of the “11Chaori Bond” in 2014 marked that China's bond market had begun to break the rigid redemption,and the risk of bond default was gradually exposed.At the same time,the supporting system for the disposal of defaulted bonds has yet to be improved.At this stage,China's financial market has a certain degree of distortion in the risks pricing.Credit spread is the part of a corporate bond yield beyond the risk-free interest rate.It reflects the risk compensation of bond investors for holding bonds,and the most direct compensation is the loss caused by bond default.In recent years,under the background that China's bond default events have gradually increased and become more normalized,in theory,how much bond credit spreads,which are used to measure the default risk,can be explained by the default risk of China's bond market.With more attention.However,limited by data and methods,domestic research on this issue needs to be deepened and enriched.This article focuses on the research of default risk compensation as one of many risk compensations,and its contribution to the total market risk premium—bond credit spreads,and provides some empirical evidence for the effectiveness of default risk pricing.The research conclusions of this article will help scholars,investors and regulatory agencies to understand the current situation of default risk pricing more comprehensively.This is essential to further improve the bond market supporting system construction and protect the interests of market participants.It is the market-based pricing of default risk in my country.Important foundation.Taking the default risk to the bond credit spread's overall,level,and volatility contribution ratio as the research object,with the two research directions of horizontal rating structure and vertical time trend,this article attempts to explore the interpretation of my country's default risk on the credit spread of different credit ratings of bonds.First of all,the overall contribution ratio is to analyze the pricing efficiency of default risk from the perspective of historical actual default statistics.The time vertical can reflect the changes in the overall characteristics of the market,and the rating hierarchy can reflect the underestimation of risks.Second,the analysis of the horizontal contribution ratio analysis of the impact of default risk on credit spreads in the context of structural changes in economic fundamentals can reflect the differences in the influence of different time zone systems and the risk appetite of investors in time zones affected by default risks.Finally,the volatility dimension uses long-term time-varying data to determine the weight of its contribution to the volatility of credit spreads,showing the non-linear impact of each rated bond on the expected credit loss and expected excess return statement.This article adopts the method of combining normative research and empirical research,focusing on theoretical and empirical analysis,and uses panel data for testing.This article follows the idea of "current situation characteristics-literature combing-theoretical analysisempirical analysis-mechanism exploration-policy recommendations",and conducts a systematic study on the pricing of default risk in my country's bonds.This article first introduces the research background,significance,methods,and related literature of this article Analysis and theoretical basis for topic selection.Then conducted a series of empirical tests from three perspectives,mainly analyzing the default risk of each rated bond and its interpretation of the bond credit spread level value and volatility data,and considering the time zone system(with structural changes),When the characteristics of each rated bond(the marginal contribution of the influencing factors caused by the investor's credit risk preference)are different,the default risk has a nonlinear impact on the bond credit spread.In addition to the introduction,there are five chapters in this article.The introduction is to introduce the research background and significance of this article.The first chapter introduces the theoretical background of default risk pricing in bond credit spreads.It takes default risk premium theory and incomplete information theory as the theoretical basis for the impact of default risk on bond credit spreads,and then introduces the actual background of China's bond default system and development path.The second chapter is to explore the size of China's overall default risk and the impact of market default expectations on bond credit spreads based on this,and then examine the characteristics of China's current default risk pricing.The study found that:(1)Using three academic and industry authoritative methods to measure my country's default risk from2014 to 2019,it is found that the expected default loss has a very small impact on the pricing of high-rated bond credit spreads,and is significantly lower Contribution rate in low-grade bonds.(2)From the perspective of time,the spread of each rated bond gives higher and higher weight to the actual default risk assessment.Therefore,my country's default risk expectations are gradually being reflected in market pricing.(3)In the case of bond default risk pricing,developed countries with mature financial markets are more market-oriented than my country.(4)In China's structural model spread data,the actual credit spread of the theoretical value of the default risk of the low-rated group is almost the same,but the theoretical default spread of the high-rated bond group weighs only about 50 in the actual credit spread of the bond.%,indicating that the theoretical model is also the same as the historical default rate: the credit risk of high-grade bonds is significantly underestimated;and the default risk of low-grade bonds is more fully reflected in bond prices.The third chapter is based on the second chapter to further study the structural changes of the impact of default risk on bond credit spreads.Through the comparison and analysis of horizontal rating and vertical time zone system under two zone system changes,the research found that:(1)After the model controls the macro factors and maturity arbitrage factors,when the market encounters the impact of default risk,investors will shift from bonds with ratings below A to high-grade bonds with higher credit quality out of risk aversion.Funds in the market are biased towards safer bonds,pushing up their prices,causing the internal rate of return of bonds to fall.This part of the decline fully compensated for the increase in bond spreads caused by the credit risk premium,so the increase in high-grade bond spreads under the impact of default risk was smaller than that of low-grade bonds.(2)The impact of default risk on high-grade(above AA rating)bond spreads is significantly smaller than the market average,and the impact is not significant in all time zones.The decline in economic growth does not reduce the risk appetite of high-grade bond investors.On the contrary,the cost of arbitrage financing only has a significant impact on high-grade spreads;while low-grade bond spreads will generally overestimate the current default risk and decline with economic growth And the uplift,showing counter-cyclicality.(3)The empirical results of rating groupings show that the default risk of my country's bond market is significantly underestimated in the high-grade bond group,and the impact is not significant in all regions.The low-grade bond group has been affected by default pressure more than the market average.Chapter 4 examines the contribution rate of default risk and its premium to the fluctuation of credit spreads on the basis of Chapters 2 and 3,and analyzes the dynamic nonlinear relationship between them and the rated bonds.The empirical results show that:(1)The first-order VAR model shows that the smaller the excess return in the current period,the larger the credit spread,and the higher the excess return in the next period.(2)The longterm dynamic VAR model shows that investors' expected credit default risk on bonds has a positive impact on credit spreads and their contribution increases with the decline in ratings.Investors' expected excess returns on bonds generally have a positive effect on credit spreads.Impact but its contribution diminishes as the rating drops.(3)The investor's credit loss expectations and excess return expectations together contributed 75% of the changes in credit spreads,and the remaining 25% corresponds to the interaction of default and nondefault factors.Chapter 5 analyzes the roots from reality based on the empirical results of the first three chapters,exploring what factors hinder the pricing of default risk in bond prices.These include implicit government guarantees,market preference for debt ratings,and supporting facilities for default resolution.In short,the conclusions of this article can help better understanding default risk pricing.For example,under the impact of default risk,the increase in credit spreads of high-grade bonds in my country is smaller than that of low-grade bonds,indicating that the default risk is significantly underestimated in the high-grade bond group.Therefore,there are structural differences in the pricing of default risk in China.In order to better enable the market to play a decisive role in risk pricing,China's financial regulatory authorities should improve the default risk handling mechanism,unblock risk market-based handling channels,and guide the market to form reasonable expectations.At the same time,reform the incentives of China's bond rating agencies to solve the problem of credit rating distortion from the source.The combination of risk rating and resolution reform can better improve the information environment of the market bond market,allow capital to be allocated more efficiently,and correct investors' preference for high-risk bonds,thereby reducing the financing costs of SMEs and breaking the "credit contraction-default" The negative feedback.Ultimately,asset prices can more truly reflect economic fundamentals,thereby reducing information asymmetry in the financial market,advancing the reform of China's capital factor market allocation,and realizing capital to drive the sound development of the real economy.