On the relationship between stock liquidity and corporate bond credit spreads

Based on the spillover effects between stock and bond markets in China, an endogenous default credit model which includes both outside and inside liquidity shocks to stock and bond markets was presented. The effects of outside and inside liquidity shocks on corporate bonds spreads were analyzed. An empirical analysis of corporate bonds traded in Shanghai and Shenzhen stock exchanges during 2008-01-01～2016-12-31 was presented, and the effects of liquidity shocks on corporate bonds spreads predicted by the model were confirmed. For debts with shorter maturities and higher risks, the effects are even more significant.