Abstract
We propose a joint yield curve model to analyze the interactions among pricing factors for government and corporate bonds in China. Empirical results show that the explanatory power of liquidity and credit risks for corporate bond yields is rating- and maturity-dependent. Short-term interest rate shocks positively affect liquidity and low-rated credit risks, with strong risk contagion among credit risks. Although government bonds facilitate a “flight to liquidity” and provide a “safe haven” for investors, they suffer from liquidity and credit risks. Since 2015, credit risk has played an important role in the rise of systematic risks in Chinese bond market.
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