A Study On The Factors Affecting The Credit Spread Of Corporate Bonds In Different Stages Of China 's Business Cycle

After the financial crisis in2008, two critical changes have happenedin China’s credit bond market. One is the sharp rise in the nominal amount of the bonds issued by local government financing platforms, which has caused great concern among regulators and investors since this can be a great source of the systematic risk in China’s financial market. The other change is the sharp rise of the number of downgraded enterprises in recent years due to the deterioration of operating performance, a few of them have come very close to the edge of default. These issues have made credit risk a very hot and important topic in China.This paper first analyzed the performance of the credit spreads of corporate bonds in China duringvariousbusiness cycle stages and concluded thatthe credit spreads have a significant counter-cyclical feature.This paper then conducted a regression analysis on the determinants of credit spreads during different business cyclestages based on the famous structured model proposed by the Nobel economist Merton. It turns out thatthe structured model has a very strong explaining ability of the changes of credit spreads in various stages of the business cycle. The risk free rate and the slope of the yield curve are negatively correlated to the credit spreads during most stages of the business cycle. The volatility of the stock market has a significant effect on the credit spreads too, but the coefficients are very unstable.The stock market performance does not have a significant effect on the credit spreads.Furthermore,this paper separately introduced dummy variables to control the direction of the changes of the economic growth, the changes of the inflation rate and the monetary policy. The findings are quite meaningful.The direction changes in the monetary policy have significant effect on the credit spreads. The direction of the changes of the economic growth andthe inflation rate has significant effect on credit spreadsduring the revivals and recession stages as well,but not the same case for the expansions and contractions.