Working Paper: NBER ID: w26520
Authors: Hui Chen; Zhuo Chen; Zhiguo He; Jinyu Liu; Rengming Xie
Abstract: We provide causal evidence for the value of asset pledgeability. Our empirical strategy is based on a unique feature of the Chinese corporate bond markets, where bonds with identical fundamentals are simultaneously traded on two segmented markets with different rules for repo transactions. We utilize a policy shock on December 8, 2014, which rendered a class of AA+ and AA bonds ineligible for repo on one of the two markets. By comparing how bond prices changed across markets and rating classes around this event, we estimate that when the haircut increases from 0 to 100%, the bond yields increase in the range of 39 to 85 bps. These estimates help us infer the magnitude of the shadow cost of capital in China.
Keywords: asset pledgeability; bond prices; repo transactions; Chinese corporate bond markets
JEL Codes: G12; G18; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Policy shock on December 8, 2014 (E60) | Significant increase in bond yields (E43) |
| Increase in haircut from 0 to 100 (E31) | Increase in bond yields (E43) |
| Change in pledgeability (G32) | Increase in bond yields (E43) |
| Policy shock (E65) | Divergence in exchange premia between treatment and control group (C22) |
| Negative bias from cross-market arbitrage (G41) | Underestimation of value of pledgeability (G32) |
| Estimates of shadow cost of capital (G19) | Value of pledgeability (G32) |