Implied Bond Default Rate and Stock Price Downside Risk——Evidence from China’s Capital Market

Abstract

Abstract: Under the parallel financing structure of equity and debt, the debt payment of listed companies has a direct impact on the stock prices. Taking the A-share listed companies that issued credit bonds from January 2002 to December 2018 as samples, this paper systematically studies the impact of implied bond default risk on the downside risk of stock prices. The results show that implied bond default rate index has a significant positive impact on the downside risk of stock price, and the higher the implied default rate of bond is, the greater the downside risk of stock price is. Moreover, the external macroeconomic environment represented by the correlation of the stock and bond market, and the uncertainty of economic policy will further strengthen the positive impact of implied default rate on the downside risk of stock price. The stronger the dynamic correlation and the uncertainty of economic policy are, the greater the impact of implied default rate on the downside risk of stock price is. This paper also finds that the effect of implied default rate on the downside risk of stock price is realized by affecting investor sentiment. The average influence proportion of sentiment is up to 25.84%. This paper reveals that bond default will lead to cross-market risk diffusion, which plays a warning role in risk prevention in the construction of multilevel capital market. It also provides an explicit signal for equity market investors to predict the downside risk of stock price.

Key words: implied default rate, downside risk, investor sentiment, risk prevention

Yang Lihua, Zhu Hongbing, Xu Changxin. Implied Bond Default Rate and Stock Price Downside Risk——Evidence from China’s Capital Market[J]. Management Review, 2022, 34(10): 52-66.

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