The Intra-Regional Spillover Effect of Bond Defaults: Evidence from China's Credit Bond Market

Taking the first bond defaults in each province in China as credit events, we adopt a difference-in-difference model and find that credit spreads of other corporate bonds in the same province increase by 6 basis points on the first default event day, suggesting a spillover effect. The spillover effect is stronger for local state-owned-enterprise bond defaults, and the magnitude of the spillover effect is negatively related to firm-government connections. Meanwhile, defaults related to investor protection clauses have the largest spillover effect. We also find that provinces with higher GDP growth rates and higher general public budget revenue are less affected by the first bond defaults. Overall, our paper provides new evidence of an intra-regional spillover effect in bond defaults.