Does Spread Really Reflect the Crisis?: The Empirical Evidence from China Bond Market

Abstract

The co-movement of Treasury bond and corporate bond yields are crucial to risk management of bond investment. In this paper, we build a copula model with regime switching to accommodate the potential non-linear and asymmetric dependence structure between Treasury bond and corporate bond yields in China debt market. The empirical results show that there exists great symmetric tail dependence between two markets, and dependence structure changes with the implicit switching regimes. After the global financial crisis at 2008, the correlation between government bonds and corporate bonds has largely weakened, but still over 0.5.