The Demand Effect of Yield-Chasing Retail Investors: Evidence from the Chinese Enterprise Bond Market

Abstract

Enterprise bonds with higher demand of retail investors are traded at significantly higher prices in the exchange market than the same bonds traded by institutional investors in the interbank market in China. The price difference is higher for bonds with higher yield to maturity, lower supply, and higher demand exposure to retail investors. Our results suggest that risky bonds can be priced significantly higher due to the demand of yield-chasing investors and a sudden negative demand shock can generate a sharp decrease in bond values. The demand and supply effects are stronger for bonds with higher duration due to the limited risk-sharing capacity of risk-averse arbitrageurs.

Keywords: Enterprise bonds; Yield-chasing; Demand and supply effects; Limits to arbitrage; The law of one price

JEL Classification: G12, G14, G15