Pricing the Pandemic: Evidence from the Bond Market in China

ABSTRACT

This study investigates whether and how the pandemic is priced in the bond market in China. Using the city-level COVID-19 cases on a daily basis, we find a significant positive relationship between the pandemic outbreak and corporate credit spreads, implying that investor risk perception on pandemic exposure attracts a premium. Consistent with the default risk channel, corporate financial resilience alleviates pandemic pricing. Information asymmetry and tail risk can amplify the pricing effect because of reduced investor risk-bearing capacity. These findings are robust in addressing endogeneity concerns. We contribute to the emerging literature on the pandemic effect on credit markets.

KEYWORDS:

• COVID-19 pandemic
• bond financing
• credit spreads
• default risk
• risk perception

JEL:

• G12
• G14
• D81

Acknowledgments

We are grateful for helpful support and suggestions from the editors and the two anonymous reviewers, and participants at the 2022 Digital Finance Conference on New Challenges to Financial Stability in the Post COVID-19 Era. All of the remaining errors are our own.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. Baidu index is constructed based on the big data of netizen keyword search volume provided by a data analysis platform of Baidu (website: https://index.baidu.com), which is the leading search engine in China, especially since Google withdrew from China in 2010. Baidu index has been a widely-used quantitative measure for public concern, opinions, consensus or sentiment (Fang et al. 2020; Li et al. 2021).

Additional information

Funding

This work is supported by the Fundamental Research Funds for the Central Universities and the Research Funds of Renmin University of China [21XNA010].