An Empirical Analysis of the Impact of Credit Risk Mitigation Warrants on Bonds: Evidence in Chinese Markets

Ping Li, Hui Meng and Zengpeng Li

Emerging Markets Finance and Trade, 2019, vol. 55, issue 13, 2970-2981

Abstract: Credit risk mitigation warrants (CRMW), sometimes called Chinese credit default swaps (CDS), are created by institutions other than the issuer of an underlying bond to provide credit risk protection for the holder of the warrant on the underlying debt. In this paper, we investigate the impact of CRMW on the Chinese bond market by examining whether trading in them is beneficial for the underlying secondary corporate bond market. We employ period-partitioned regressions to analyze all the observations in our dataset in the absence of continuous daily trading, because bonds often trade discretely. We find that after CRMW trading was introduced, the efficiency of the bond market improved, but not bond pricing and liquidity.

Date: 2019
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DOI: 10.1080/1540496X.2019.1588107

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