Transmission of liquidity and credit risks in the Chinese bond market: Analysis based on joint modeling of multiple yield curves

Mucai Lin, Zhiwu Hong and Ge Su

International Review of Economics & Finance, 2024, vol. 91, issue C, 597-615

Abstract: We propose a joint yield curve model to analyze the interactions among pricing factors for government and corporate bonds in China. Empirical results show that the explanatory power of liquidity and credit risks for corporate bond yields is rating- and maturity-dependent. Short-term interest rate shocks positively affect liquidity and low-rated credit risks, with strong risk contagion among credit risks. Although government bonds facilitate a “flight to liquidity” and provide a “safe haven” for investors, they suffer from liquidity and credit risks. Since 2015, credit risk has played an important role in the rise of systematic risks in Chinese bond market.

Keywords: Term structure model; Liquidity risk; Credit risk; Risk spillover (search for similar items in EconPapers)
JEL-codes: C11 E43 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:91:y:2024:i:c:p:597-615

DOI: 10.1016/j.iref.2024.01.017

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