Research On Influencing Factors Of Risk Premium Of Chinese Local Government Bonds

The statistical work of Chinese local government debt at the end of2012is in progress, although the latest statistical data has not announced yet,the scale of local government debt at the end of2010has already reached10.7trillion, the local government debt has increased a lot in the last two years, so Chinese local government debt should not be underestimated, the problem of local government debt is eager to be solved. Comprehensive experience of developed countries, issue local government bonds is an effective way to solve the problem of local government debt management is not standardized and risk is difficult to control. Chinese local government began to issue bonds in2010, there are850billion in totally by the end of2012. As a new investment product in the bond market and it’s debtor is local government, local government bonds attract investor’s attention since it’s issue. To an investment product, the things investors concerned most are risk and yield, we can know yield is adapted to risk or not by research on bond’s risk premium.There is no empirical studies on risk premium of Chinese local government bonds, this paper is going to do a study on that.The aims of this paper are to inspect yield adapt to risk or not in Chinese local government bonds by a quantitative research on risk premium, to discover problems in Chinese local government bond, to provide suggestion for the issuance of Chinese local government bond, to promote local government bond market develop healthy, and to provide references for the solve of local government debt problems at the same time.In this paper, we chose the data from2010to2012, and took an empirical study on local government bonds’ risk premium by a modified reduced form model. Then, we explained the anomalies from the aspects of fiscal policy, monetary policy, rent-seeking behavior and so on.There are six parts in this paper. The first part is introduction, in this part we introduced the research background, the content and framework. The second part is literature review and risk premium model which includes structural model, reduced form model and mixture models, and their advantages and disadvantages are briefly analyzed. The third part is current situation of Chinese local government bond market, we analyzed the scale of Chinese local government bonds, its maturity structure and premium levels. In the fourth part, we analyzed influential factors of local government bonds’ risk premium, these factors are credit risk, liquidity risk, the investors’ risk appetite, bond’s maturity structure, and macroeconomic situations. The fifth part is empirical study, based on provincial panel data we had an empirical analysis on Chinese local government bonds’ risk premium by quoted reduced form model, and using Eviews6.0.Part VI is conclusions and recommendations, we explained the anomalies on Chinese local government bonds’ premium and provided some suggestion to the development of Chinese local government bond market.Through the research process, we draw the following conclusions: first, Chinese local government bond market didn’t fully developed, there are a lot of government intervention; Second, the issuance system of Chinese local government bond has flaws, the way took the Ministry of Finance as an agency can only be a transitional method; Third, local government bonds’ risk premiums are on a low level, risks and yields are incompatible; Fourth, local government bonds risk premium is mainly affected by investors’ risk aversion degree and macroeconomic factors, while credit situations of local government have no significant correlation with the risk premium.Innovations of this paper are:In the research perspective, we cut in from the angle of local government bond risk premium, then analyzed the market level of the local government bonds and the problems. On the content of this paper, first we introduced basic situation of Chinese local government bonds. Second, we analyzed influential factors of local government bonds’ risk premium. In the end, we took an empirical study on risk premium rather than just stay in the level of qualitative analysis. In research methods, reduced form model was applied to the study of local government bonds risk premium, we used a provincial panel data to construct individual fixed effects model. What’s more, we studied relationship between local government bonds’ premium and local government credit situation from two aspects. In short, this article tried to enrich the contents, keep research methods with the times and get reasoned conclusions.