Emerging Bond Markets in Asia: Credit Spread Dynamics

Abstract

We present a comprehensive analysis of the credit spread determinants in five Asian bond markets over a sample period of 10 years, from January 2010 to December 2019. Consistent with the western literature, we find that the structural models are broadly valid even in emerging countries with developing bond markets. Empirical results unveiled that bond-specific liquidity is the most important driver that reduces the credit spread, followed by the slope of the term structure and industrial growth in the economy. In Emerging Asia, inflation is the key driver that aggravates credit spread for business firms, followed by financial market volatility. Cross-country data reveals that the Chinese corporate bond market is the largest in Asia. Indian markets offer higher yield rates, while credit spread is noted to be highest in China. The empirical findings of our study would provide important insights for the policy makers while developing the most sought-after liquid bond markets. Effective liquid bond markets would reduce the cost of capital for firms and price credit risks efficiently.