Chinese Corporate Bond Risk Factors Across Different Industries

Regardless if corporate bonds are sold in the bond market during financing, orinvestors purchase bonds in the bond market, credit risk for corporate bonds are animportant factor to consider. As default-premium compensation, credit premiumscan be used to measure the default risk of corporate bonds. Credit risk represents thepremium on returns for corporate bonds compared to risk-free interest rates. Inresearch on credit risk in the corporate bond market, this is usually represented by thedifference between returns on investment for corporate bonds and same termgovernment bonds. This paper is based on the Black-Scholes-Merton Option PricingModel, and derives the structured model representation for credit premiums, duringwhich I found three main areas which affect credit premiums: remaining term forbonds, credit ratings and other bond factors; corporate asset volatility, leverage andother microeconomic factors; market risk-free interest rates, market liquidity, businessconditions and other macroeconomic factors. Based on the effect of these three mainareas, this paper performs theoretical analysis, as well as empirical modeling usingrelevant proxy variables. In the Chinese bond market, the banking sector representsover90%of total market trading. This paper uses interbank bond market data onbonds issued before March,2013to research the period between March,2013andMarch,2015, in order to ensure that every corporate bond has real trading records inthe chosen period. The chosen corporate bonds cover the three different ratings(AAA, AA+, and AA), three different terms (short term, medium term, and long term),as well as three different industries (industrial, financial, public works) this paper usesfor comparison. During empirical analysis, this paper divides the27corporate bondsinto three groups by industry, establishing credit risk differences across corporatebonds, and uses credit increases as dependent variables and the proxy variables for thechosen factors as explanatory variables to establish two empirical analysis models. Afterwards, using model1and model2, based on the empirical model, I introduceproxy variables for industry characteristics.Using model1, I performed panel regression analysis on the three bondgroupings, and compared the regression results. I use model2to perform panelregression analysis for the industrial and financial corporate bonds, and fromobservations of the regression results, identify fit and other indicators, with anemphasis on differences across industries, and the effect of changes in corporate bondcredit premiums. This paper obtained the following conclusion: changes in creditpremiums for corporate bonds is effected by the remaining term, credit rating,risk-free interest rate, market liquidity, stock market indices, economic development,monetary supply and industry characteristics. There are great differences in thefactors effecting credit premiums for corporate bonds in different industries, and whenintroducing industry characteristic factors (changes in the Csi300index of industryand industry GDP increases), there is a marked improvement in the regression resultsfor corporate bond credit premiums, in which they better fit theoretical expectationsand the real capital market. From this we can see that credit premium changes forcorporate bonds are effected by macroeconomic conditions as well as the industry ofthe issuing corporation.