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

57 Pages Posted: 14 Jun 2016

See all articles by Clark Liu

Clark Liu

Tsinghua University - PBC School of Finance

Shujing Wang

Tongji University

K.C. John Wei

Hong Kong Polytechnic University

Ninghua Zhong

Tong Ji University - School of Economics and Management

Date Written: November 30, 2018

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

Suggested Citation

Liu, Clark and Wang, Shujing and Wei, Kuo-Chiang (John) and Zhong, Ninghua, The Demand Effect of Yield-Chasing Retail Investors: Evidence from the Chinese Enterprise Bond Market (November 30, 2018). Journal of Empirical Finance, Vol. 50, 2019; First Annual Volatility Institute at NYU Shanghai (VINS) Conference - 2015. Available at SSRN: https://ssrn.com/abstract=3351921 or http://dx.doi.org/10.2139/ssrn.2795644

Clark Liu

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Shujing Wang (Contact Author)

Tongji University ( email )

Shanghai
China

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Ninghua Zhong

Tong Ji University - School of Economics and Management ( email )

Tongji A Building,
No.1 Zhangwu Road
Shanghai, Shanghai 200092
China

HOME PAGE: http://sem.tongji.edu.cn/semen_data/attachments/month_1507/2015720112620.pdf

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