Home >> Working Paper
The Joint Dynamics and Risk Transmission between Chengtou Bond Spreads and Treasury Yields in China
Read        DownLoad
TitleThe Joint Dynamics and Risk Transmission between Chengtou Bond Spreads and Treasury Yields in China  
AuthorNiu Linlin, Hong Zhiwu and Li Ye  
OrganizationThe Wang Yanan Institute for Studies in Economics (WISE), Xiamen University;; 
Key WordsChengtou Bond Spread; Local Government Debt; Treasury Yield; Extended No-Arbitrage Nelson-Siegel Model 
AbstractChina’s local government debt financing grows rapidly featuring surging chengtou bond issuance and risk exposure since the global financial crisis in 2008. The accumulation of local government debt poses systemic risks to China's fiscal and financial systems. Using weekly data from the beginning of 2009 to the end of 2014, this paper studies the joint dynamics and risk transmission mechanism between chengtou bond spreads and treasury yields under the framework of the extended no-arbitrage Nelson-Seigel term structure model, which guarantees the no-arbitrage relationship between treasury yields of different maturities. The results of this paper show that the chengtou bonds indeed exhibit considerable local risks and can lead to systemic risk of the treasury bonds, such that the treasury yields have significant component of risk premium due to chengtou bond risk. On the other hand, as the most safe asset in China at present, the treasury yields with short-to-medium maturities decrease as a result of the “fly-to-safety” effect when the chengtou bond risk increases. Meanwhile, the dynamics of chengtou bond spreads reflect the market-oriented risk pricing by investors on credit and liquidity risks under limitations of the government implicit guarantee. Under this condition, it is the right timing to reasonably standardize and institutionalize the local government bond market with transparent market mechanism. 
Serial NumberWP990 
  • Institute of Economics, Chinese Academy of Social Sciences
  • Copyright Economic Research Journal
  • The uploaded articles by this website express the authors’ views, not necessarily the views of this website.
  • Perennial Legal Counsel: Lu Kang (Chong Guang Law Office)
  • ISSN 0577-9154 CN 11-1081/F Postal Distribution Code 2-25l (Domestic) M16 (Overseas)
  • ICP 10211437 (Beijng)
  • No.2,Yuetan Bei Xiaojie, Xicheng District, Beijing 100836, P. R. China
  • Phone/Fax: (+8610) 68034153