An Empirical Analysis Of Liquidity Effects In Yield Spreads In China Corporate Bond Market

In2007, Premier Wen said:“we should accelerate the development of the bondmarket, and promote the reform of marketization of bond issuance system”, so thecorporate bond began to develop rapidly. Through the development process of Chinesecorporate bond, liquidity problem is always present. At the same time, the United Statessubprime mortgage crisis spread to countries all over the world, and liquidity problemattracts scholars’ attention again.This paper summarizes and analyzes the research status of liquidity and yieldspreads of corporate bond, and explores deeply the relationship between liquidity andyield spreads as well as mechanism of influence on liquidity and yield spreads ofcorporate bond. On this basis, drawing on previous experience which can be applied toselect and build liquidity measures of this study, regression models of liquidity and yieldspreads are constructed and based on the state of the financial crisis and the normalperiod. And we use a unique data set between January2008and December2011forempirical analysis. The study employs a wide range of liquidity measures and finds thatliquidity effect can explain market-wide corporate yield spreads. Findings suggest that pmeasure does well measuring the liquidity of corporate bond, and other liquiditymeasures can’t compare with p. We define the crisis period, and divide the samples intonormal period and crisis period, finding that liquidity effect in crisis period can increaseapproximately24%of the explained market-wide corporate yield spreads compared tonormal period, so we conclude that the economic impact of the liquidity measures issignificantly larger in crisis period.Liquidity has been one of the important issues of the capital market in theory,which has been paid close attention from the worldwide. And the research on marketliquidity in the Western developed countries, both in theory and in practice, have formeda relatively complete theoretical system. The appearance of Chinese corporate bond in1984has been developing slowly. We investigate whether liquidity is an important pricefactor in China corporate bond market. In particular, we focus on whether liquidityeffect is more pronounced in period of financial crises. On the one hand, it will help toimprove our corporate bond pricing model. On the other hand, analysis of Chinesecorporate bond’s relation between liquidity and yield spread can help investors, issuersof enterprise and market behavior regulators to judge in corporate bond market.