Pricing the Pandemic: Evidence from the Bond Market in China

Abstract

This study investigates whether and how the pandemic is priced in the bond market in China. Using data of COVID-19 daily confirmed cases by city, we find a significant positive relationship between the pandemic outbreak and corporate credit spreads, implying compensation for investor risk perception on pandemic exposure. Consistent with the default risk channel, corporate financial resilience alleviates pandemic pricing. Information asymmetry and tail risk can amplify the pricing effect because of reduced investor risk-bearing capacity. These findings are robust in addressing endogeneity concerns. We contribute to the emerging literature on the pandemic effect on credit markets

Keywords: COVID-19 pandemic, bond financing, credit spreads, default risk, risk perception

JEL Classification: G12, G14, D81