The Intra-Regional Spillover Effect of Bond Defaults: Evidence from China's Credit Bond Market

39 Pages Posted: 24 Jan 2021

See all articles by Wenlong Wang

Wenlong Wang

Tilburg University - TIAS School for Business and Society; Central University of Finance and Economics (CUFE) - School of Finance

Yuqin Huang

Central University of Finance and Economics (CUFE) - School of Finance

John Watson

Monash University - Department of Banking and Finance

Bowen Yang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Date Written: November 30, 2020

Abstract

Taking the first bond defaults in each province in China as credit events, we adopt a difference-in-difference model and find that credit spreads of other corporate bonds in the same province increase by 6 basis points on the first default event day, suggesting a spillover effect. The spillover effect is stronger for local state-owned-enterprise bond defaults, and the magnitude of the spillover effect is negatively related to firm-government connections. Meanwhile, defaults related to investor protection clauses have the largest spillover effect. We also find that provinces with higher GDP growth rates and higher general public budget revenue are less affected by the first bond defaults. Overall, our paper provides new evidence of an intra-regional spillover effect in bond defaults.

Keywords: Bond default, Spillover effect, Implicit government guarantee, Chinese bond market

JEL Classification: G12, G14

Suggested Citation

Wang, Wenlong and Huang, Yuqin and Watson, John and Yang, Bowen, The Intra-Regional Spillover Effect of Bond Defaults: Evidence from China's Credit Bond Market (November 30, 2020). Available at SSRN: https://ssrn.com/abstract=3739855 or http://dx.doi.org/10.2139/ssrn.3739855

Wenlong Wang (Contact Author)

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Yuqin Huang

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

John Watson

Monash University - Department of Banking and Finance

Melbourne
Australia

Bowen Yang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.1954 Huashan Road
Shanghai, Shanghai 200030
China

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