A Study On The Liquidity Spillover Effect And Its Impact On Corporate Bonds Pricing

Liquidity is the most important factor for the market.Adequate liquidity is an important prerequisite to ensure the healthy and orderly operation of financial markets.Therefore,profound understandings of the impact of liquidity risk factors,the transmission mechanism and the impact on the price of financial assets have important significance whether it is for investors' investment decisions or for the risk prevention of regulators.In this paper,based on the data of the stock and bond markets,we empirically study the liquidity linkage between the stock and bond markets,and discusse the nonlinear characteristics of the two market liquidity,the impact factors and the impact on bond yields.We find significant bidirectional nonlinear Granger causality between the liquidity of stock and bond markets based on the nonlinear Granger causality test.The result provides evidence that there exists nonlinear liquidity linkage between two markets.Based on the MSH(2)-VAR(1)model and cumulative impulse response,the results show that macro variables can impact the liquidity of two markets significantly,particularly in the down market.Besides the shocks of macro variables will lead to different degrees of cross-market trading activities in different regime.At the same time,taking into account the development trend and the important position of corporate bonds in the bond market,we take the fixed rate corporate bonds as the research objects,based on the Markov regime switching model(MS model).The results indicate that Markov regime switching model can precisely recognize the periods of normal operation and fund shortage in bond market.In normal times,liquidity shocks have insignificant effect on bonds' yield spreads,whereas in times of fund shortage,liquidity shocks lead the liquidity premium down due to the existence of investment transfer.A rise in stock illiquidity produces different effects on different credit rating bonds: the stock illiquidity is negatively relative to the yield spreads of high credit rating bonds,while that is positively relative to the yield spreads of low credit rating bonds.Therefore,we should take full account of the nonlinear effects of liquidity spillovers.At the same time,investors should also be fully aware of the characteristics of regime switching to reduce unnecessary losses.