The Joint Dynamics and Risk Transmission between Chengtou Bond Spreads and Treasury Yields in China
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| Title | The Joint Dynamics and Risk Transmission between Chengtou Bond Spreads and Treasury Yields in China
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| Author | Niu Linlin, Hong Zhiwu and Li Ye |
| Organization | The Wang Yanan Institute for Studies in Economics (WISE), Xiamen University |
| Email | llniu@xmu.edu.cn；hzw1888@126.com；576338379@qq.com |
| Key Words | Chengtou Bond Spread; Local Government Debt; Treasury Yield; Extended No-Arbitrage Nelson-Siegel Model |
| Abstract | China’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 Number | WP990 |
| Time | 2015-12-15 |
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