The Research Of Credit Spread For China’s Company Bonds: Based On Insolvency Probability

Corporate bond market in China has been developing rapidly in recent years. Along with a large number of low and medium grade bonds issued, the bond credit default risk began to emerge, so credit spread analysis gets much more attention than ever. Based on classic Merton(1974) pricing model on corporate debt, Leland(1994) extension of capital structure, KMV credit risk model in practice and the recent research from Atkeson "Eisfeldt and Weill(2013), this paper introduces a simple and effective way to compute a company’s insolvency probability, which is used as the proxy of default risk. In fully draw lessons from the former research of credit spreads, and considers the current situation of China’s corporate bond market, the theory of credit risk decomposition, credit risk, liquidity risk, and macroeconomic risk, the thesis carefully selects the suitable explanatory factors for our country’s credit debt market, which are used to do empirical analysis.The thesis collects corporate bonds data from September 2011 to December 2013 of listed companies, after eliminates abnormal data, gets 17990 samples across 113 weeks, and then to do mixed cross-section OLS regression analysis. After that, data are divided into three groups according to the credit rating to do separate regression, and then discussed the explanatory power of insolvency probability.It is found that the credit risk has the most profound effect on the low grade bond and liquidity risk has strongest influence on the intermediate bond, the monetary policy in macroeconomic risks has big influence on corporate bonds, and the credit spreads were lowered wholly in the year 2013, especially for low grade bonds. The study found that the intermediate bond has somewhat special features, that is, it has largest affection by the coupon rate and the virtual factor of state-owned enterprises. For the above conclusion from empirical analysis, the thesis discusses the causes of the fact discovered. Through the comparative analysis, it is found that it is better to use idiosyncratic volatility not total volatility to calculate insolvency probability as it has much more influence on credit spreads. It is also found that the insolvency probability are much more consistent to the explanatory power of different grades bonds than directly use stock volatility, so it is a good proxy variable for default risk. Finally, it analyzes the deficiency of this article, and the direction of further works.