Credit Risk and Financial Regulations
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Abstract
Abstract
This article examines how aggregate default risk influences the illiquidity premium in China's corporate bond market. The article finds out that the illiquidity premium only exists after the first bond default event in 2014 and remains significant throughout the default wave period and non-substantial default period. However, it was a different situation for the interaction term between default risk and illiquidity. The amplification effect is strongly positive during 2014-2019 period, but it turns negative during 2019-2026 period. The result indicates a reversal in the relationship between aggregate default risk and illiquidity factor since the market adapts to debt extensions and structural adjustments. Furthermore, cross-sectional analysis shows that the default-illiquidity amplification concentrates in non-AAA bonds, low-ROA issuers and highly leveraged firms during the default wave period. However, the amplification term turns negative across all risk categories in the later non-substantial default period. This means that investors tend to hold the bonds that have safe expectation when the aggregate default rate increases. Regional analysis further illustrates that underdeveloped regions exhibit higher overall sensitivity to aggregate default risk.
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@article{Jiang2026Temporal,
title = {The Temporal Influence of Illiquidity and Default on Pricing},
author = {Bowei Jiang},
journal = {Advances in Economics Management and Political Sciences},
year = {2026},
doi = {10.54254/2754-1169/2026.36994},
url = {https://doi.org/10.54254/2754-1169/2026.36994}
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