The Liquidity Premium in China’s Corporate Bond Market: A Stochastic Liquidity Discount Approach
China’s bond market has been ranked third globally; however, China’s corporate bonds are significantly less liquid than its stocks. Liquidity risk is an important component in China’s corporate bond spreads. In this paper, we propose a stochastic liquidity discount factor model to evaluate the liqui...
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| Format: | Article |
| Language: | English |
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MDPI AG
2022-06-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/10/7/130 |
| _version_ | 1797416101246664704 |
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| author | Xiaoping Min Min Ji |
| author_facet | Xiaoping Min Min Ji |
| author_sort | Xiaoping Min |
| collection | DOAJ |
| description | China’s bond market has been ranked third globally; however, China’s corporate bonds are significantly less liquid than its stocks. Liquidity risk is an important component in China’s corporate bond spreads. In this paper, we propose a stochastic liquidity discount factor model to evaluate the liquidity risk premium and its term structure in China’s corporate bond market. The Monte Carlo simulation technique is used to quantify the impact on the liquidity premium of various liquidity factors: the liquidity level, liquidity volatility, liquidity shock, and the liquidity elasticity. Our findings conclude that the liquidity level is the most significant component of a liquidity premium. The impact on the liquidity premium of other liquidity factors is all conditional on the liquidity level. In addition, the impact of liquidity shocks and volatility is also subject to the market’s equilibrium mechanism. Further, the term of a bond affects the premium both directly and indirectly through its influence on a bond’s liquidity. |
| first_indexed | 2024-03-09T05:58:45Z |
| format | Article |
| id | doaj.art-e4a78d6731844486aeb3402bc4d5749c |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-09T05:58:45Z |
| publishDate | 2022-06-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-e4a78d6731844486aeb3402bc4d5749c2023-12-03T12:11:24ZengMDPI AGRisks2227-90912022-06-0110713010.3390/risks10070130The Liquidity Premium in China’s Corporate Bond Market: A Stochastic Liquidity Discount ApproachXiaoping Min0Min Ji1School of Finance, Jiangxi University of Finance and Economics, Nanchang 330013, ChinaDepartment of Mathematics, Towson University, Towson, MD 21093, USAChina’s bond market has been ranked third globally; however, China’s corporate bonds are significantly less liquid than its stocks. Liquidity risk is an important component in China’s corporate bond spreads. In this paper, we propose a stochastic liquidity discount factor model to evaluate the liquidity risk premium and its term structure in China’s corporate bond market. The Monte Carlo simulation technique is used to quantify the impact on the liquidity premium of various liquidity factors: the liquidity level, liquidity volatility, liquidity shock, and the liquidity elasticity. Our findings conclude that the liquidity level is the most significant component of a liquidity premium. The impact on the liquidity premium of other liquidity factors is all conditional on the liquidity level. In addition, the impact of liquidity shocks and volatility is also subject to the market’s equilibrium mechanism. Further, the term of a bond affects the premium both directly and indirectly through its influence on a bond’s liquidity.https://www.mdpi.com/2227-9091/10/7/130corporate bondsstochastic liquidity discountliquidity premiumliquidity spreadMerton model |
| spellingShingle | Xiaoping Min Min Ji The Liquidity Premium in China’s Corporate Bond Market: A Stochastic Liquidity Discount Approach Risks corporate bonds stochastic liquidity discount liquidity premium liquidity spread Merton model |
| title | The Liquidity Premium in China’s Corporate Bond Market: A Stochastic Liquidity Discount Approach |
| title_full | The Liquidity Premium in China’s Corporate Bond Market: A Stochastic Liquidity Discount Approach |
| title_fullStr | The Liquidity Premium in China’s Corporate Bond Market: A Stochastic Liquidity Discount Approach |
| title_full_unstemmed | The Liquidity Premium in China’s Corporate Bond Market: A Stochastic Liquidity Discount Approach |
| title_short | The Liquidity Premium in China’s Corporate Bond Market: A Stochastic Liquidity Discount Approach |
| title_sort | liquidity premium in china s corporate bond market a stochastic liquidity discount approach |
| topic | corporate bonds stochastic liquidity discount liquidity premium liquidity spread Merton model |
| url | https://www.mdpi.com/2227-9091/10/7/130 |
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