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Has the Evergrande debt crisis rattled Chinese capital markets? A series of event studies and their implications
Abstract
In response to the global concern of the Evergrande debt crisis, we document several findings of the crisis's contagion effect. First, although most real estate companies have strong financial fundamentals, the high default risk among large firms sends an alarming signal. Second, the spillover effect to peer developers is stronger in the credit market than in the stock market. Finally, the systemic financial risk of the banking sector remains low during the crisis. Overall, while there is a low probability of a wide-ranging financial crisis, a debt crisis in the real estate sector might be on the horizon.
... When there is a real estate market crisis, it has an immediate effect on investor sentiment in the real estate bond market as well as the corporate bond market. When examining the impact of the Evergrande real estate crisis on capital markets, Altman et al. (2022) find that the corporate bond market reacted more negatively and strongly during crisis events whereas equity markets reacted weaker or hardly reacted at all to events. This suggests that debt market investors are more concerned about downside risk than equity investors when considering repayment function, liquidity and market participants (Bai et al., 2019). ...
... Real estate corporate bond market in Vietnam estate bond outstanding to GDP, meaning that hypothesis 1 is accepted, while the opposite results are found for real estate sentiment and corporate bond market sentiment, meaning that hypothesis 2 and hypothesis 3 are accepted. The above results are opposite to the "manager bias" hypothesis of Du and Hu (2020) when arguing that stock market sentiment promotes corporate debt issuance but support the results of Freybote (2016) and Altman et al. (2022). This could point to the "substitution" relationship between the stock and bond markets in Vietnam since investors may prefer to allocate their funds to stocks rather than bonds when stock market sentiment is high and stock prices are rising. ...
Purpose
This paper aims to examine the effects of investor sentiment on the development of the real estate corporate bond market in Vietnam.
Design/methodology/approach
The research uses an autoregressive distributed lag (ARDL) model with quarterly data. Additionally, the study employs Google Trends search data (GVSI) related to topics such as “Real Estate” and “Corporate Bond” to construct a sentiment index.
Findings
The empirical outcomes reveal that real estate market sentiment improves the growth of the real estate corporate bond market, while stock market sentiment reduces it. Also, there is evidence of a long-run negative effect of corporate bond market sentiment on the total value of real estate bond issuance. Further empirical research evidences the short-term effect of sentiment and economic factors on corporate bond development in the real estate industry.
Research limitations/implications
Due to difficulties in collecting data, this paper has the limited sample of 54 valid quarterly observations. Moreover, the sentiment index based on Google search volume data only reflects the interest level of investors, not their attitudes.
Practical implications
These results yield important implications for policymakers in respect of strengthening the corporate bond market platform and maintaining stability in macroeconomic and monetary policies in order to promote efficient and sustainable market development.
Social implications
The study offers some suggestions for regulators and governments to improve the real estate corporate bond market.
Originality/value
This is the first quantitative study to examine the effect of sentiment factors on real estate corporate bond development in Vietnam.
... We contribute to the existing literature by investigating the potential impact of a banking shock on financial markets, with a specific focus on the recent collapse of SVB and its effect on equity markets. We also extend previous research on former studies, which primarily focused on the 2008 global financial crisis (Ajlouni et al., 2012;Cayon et al., 2016;Pattnaik et al., 2020), the COVID-19 health crisis (Aharon and Siev, 2021;Altman et al., 2022;Ozkan, 2021;Sakawa and Watanabel, 2023), and the recent Russia-Ukraine conflict (Umar et al., 2022;Yousaf et al., 2022). ...
... To explore our main objective, we track the daily data of major equity indices of major countries and further classified them into regions based on geographical location. Following previous studies (Abudy et al., 2022a(Abudy et al., , 2022bAharon et al., 2022;Aharon and Siev, 2021;Altman et al., 2022;Dyckman et al., 1984;Umar et al., 2022;Yousaf et al., 2023), we utilize the event study methodology which enable us to present a initial view of the possible ripple-on effect of the failure of large financial institution like SVB on international financial markets. We provide a preliminary analysis about the possible impact of systemic risk associated with interconnected financial markets. ...
... An effective capital market can use price information to guide resource allocation and thus create value, therefore, the ability of this stock price to reflect information becomes an important means of measuring whether the capital market operates effectively (I. EA et al.,2022; Zhu Hongjun et al., 2007) [8,9], and stock price synchronization is an important reflection of whether the price reflects the information of the company. Share price synchronization is essentially caused by information asymmetry between companies and investors, and digital transformation can play a unique role in improving information efficiency and monitoring. ...
Digital transformation is an emerging development opportunity for enterprises in the digital economy and comprehensively reflects the application of digital technology to production, operation, and management strategies. This study used data on A-share listed enterprises in Shanghai and Shenzhen from 2007 to 2022 to examine the relationship between the digital transformation of enterprises and information efficiency of the capital market. Findings revealed that digital transformation can improve the information efficiency of the capital market and that environmental uncertainty plays a more significant regulatory role. The greater the environmental uncertainty, the more enterprises with a high degree of digital transformation can promote the information efficiency of the capital market. Additional analysis showed that the promotional effect of digital transformation on the information efficiency of the capital market is better for non-state-owned enterprises and small and medium-sized enterprises. This study provides detailed insights into digital transformation and capital market information efficiency, which enriches the research related to the economic consequences of digital transformation and demonstrates the theoretical and practical value of corporate digital transformation.
... In the post-pandemic era, young people's expectations of the real estate market have weakened, and the demand for home ownership has declined in the short term. This may be due to the economic downturn and the increasing prominence of systemic risks in the real estate market, resulting in a lack of confidence in the real estate market expectations of young people [12][13][14]. ...
The housing problem of young people is one of the manifestations of the imbalanced and insufficient development of China’s housing market. Solving housing issues for young people and improving their living conditions is of great significance for promoting the sustainable and healthy development of the real estate market. In order to analyze the housing issues of young people in China during the post-pandemic era, this paper investigates young people in the Nanjing Metropolitan Coordinating Region through questionnaires and interviews. The content of the questionnaire survey mainly includes the current housing situation, choice of renting or purchasing a home, expectations of real estate market, and future plans for purchasing a house of young people. The research results indicate that there are problems in the current housing market, such as strong purchasing preferences, imbalanced supply structure in the rental market, limited financial support for purchasing housing, low housing security levels, and small coverage of the housing provident fund. In order to solve the housing problems of young people, government departments should actively promote the formation of a multi-level housing supply structure, accelerate the promotion of the same rights for renting and purchasing, establish a standardized housing rental market, optimize the housing security policy for young people, and expand the coverage of the housing provident fund. The findings of this study have significant policy implications for easing the housing pressure on young people and building a youth-development-oriented city.
... Several studies have examined the reputation contagion during several events like the bankruptcy of Lehman Brothers (Chen and Yeh, 2021;Kim, Kim, and Lee, 2015) and the collapse of the cryptocurrency exchange FTX (Yousaf, Riaz, and Goodell, 2023). Second, our study extends the existing studies, which explore similar issues during the global financial crisis (Ajlouni et al., 2012;Cayon, Sarmiento-Sabogal, and Shukla, 2016;Gubareva, Umar, Teplova, and Vo, 2023) COVID-19 (Altman et al., 2022;Sakawa and Watanabel, 2023) and Russia-Ukraine military conflict (Umar, Riaz, and Yousaf, 2022;Yousaf et al., 2022). ...
This article aims to introduce the structural and instrumental power of real estate companies in China, using Evergrande as an example, and provide possible regulation designs that can modify the Three Red Lines regulation policy. China's real estate sector has played a significant role in the country's development, and Evergrande is a prominent real estate corporation in China. The real estate sector in China possesses robust structural and instrumental dynamics. To eliminate the financial crisis in the real estate industry, the Chinese government has introduced three red line policies to increase supervision of real estate companies. Evergrande has experienced serious financial difficulties due to regulatory upgrades, which have had numerous detrimental effects on society. This article discusses the impact of the Three Red Lines policy introduced by the Chinese government on the real estate industry. Additionally, it suggests many solutions that could help with monitoring in this regard.
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Using a difference-in-difference approach, we find that restrictions placed on the CSI 300 and CSI 500 index futures trading during the recent Chinese stock market crisis deteriorated spot market quality, particularly the September trade restrictions. Our results can be explained by the sudden risk exposure faced by alpha-strategy traders who stop trading spots after the index futures trading restrictions are introduced, thus worsening the spot market quality. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark
The procedures used in corporate bond event studies to date fail to control for heteroskedasticity due to differences in return volatility by term-to-maturity, rating, and other factors resulting in low test power. Bond return standardization yields considerably more powerful tests. Also, due to infrequent trading, use of bond transaction price observations over several days before and after an event, while giving more weight to returns calculated from transactions closer to the event, yields considerably more powerful tests than returns based solely on transactions the day before and the day after the event. Exploring the test bias caused by overlapping event dates, we find that, adjusted for rating and maturity, the correlation among standardized abnormal bond returns is small but that even fairly small correlations can result in biased test statistics. A bond market modification of the Kolari and Pynnönen (2010) procedure corrects this bias.
What capital allocation role can China’s stock market play? Counter to perception, stock prices in China have become as informative about future profits as they are in the US. This rise in stock price informativeness has coincided with an increase in investment efficiency among privately owned firms, suggesting the market is aggregating information and providing useful signals to managers. However, price informativeness and investment efficiency for state-owned enterprises fell below that of privately owned firms after the postcrisis stimulus, perhaps reflecting unpredictable subsidies and state-directed investment policy. Finally, evidence from realized returns suggests Chinese firms face a higher cost of equity capital than US firms.
We investigate the informational roles of foreign ownership in local credit rating agencies (CRAs) in the Chinese onshore debt market, which was the world's largest emerging debt market from 2008 to 2017. We find a robust negative relationship between the bond offering yield and foreign ownership in local CRAs, which suggests that these ratings certify the credit quality of debt issuers and thus enhance the market values of new debt issues. The information content of these ratings, however, is in contrast with the information provision role of foreign-owned CRAs (global CRAs). We find that these ratings provide no or weak better predictive power of issuers’ future credit performances than domestic CRAs. In addition, we find that stock and bond market reactions at the announcements of rating revisions made by global CRAs are not significantly different from those made by their domestic counterparts. We attribute the seemingly contradictory results to the preference for foreign brands in emerging markets and/or the improved bond liquidity associated with global CRA ratings.
We investigate the cross-sectional determinants of corporate bond returns and find that downside risk is the strongest predictor of future bond returns. We also introduce common risk factors based on the prevalent risk characteristics of corporate bonds—downside risk, credit risk, and liquidity risk—and find that these novel bond factors have economically and statistically significant risk premiums that cannot be explained by long-established stock and bond market factors. We show that the newly proposed risk factors outperform all other models considered in the literature in explaining the returns of the industry- and size/maturity-sorted portfolios of corporate bonds.
Chinese housing prices rose by over 10 percent per year in real terms between 2003 and 2014 and are now between two and ten times higher than the construction cost of apartments. At the same time, Chinese developers built 100 billion square feet of residential real estate. This boom has been accompanied by a large increase in the number of vacant homes, held by both developers and households. This boom may turn out to be a housing bubble followed by a crash, yet that future is far from certain. The demand for real estate in China is so strong that current prices might be sustainable, especially given the sparse alternative investments for Chinese households, so long as the level of new supply is radically curtailed. Whether that happens depends on the policies of the Chinese government, which must weigh the benefits of price stability against the costs of restricting urban growth.
We propose a measure of systemic risk, Δ CoVaR, defined as the change in the value at risk of the financial system conditional on an institution being under distress relative to its median state. Our estimates show that characteristics such as leverage, size, maturity mismatch, and asset price booms significantly predict Δ CoVaR. We also provide out-of-sample forecasts of a countercyclical, forwardlooking measure of systemic risk, and show that the 2006:IV value of this measure would have predicted more than one-third of realized Δ CoVaR during the 2007-2009 financial crisis.
We construct housing price indices for 120 major cities in China in 2003-2013 based on sequential sales of new homes within the same housing developments. By using these indices and detailed information on mortgage borrowers across these cities, we find enormous housing price appreciation during the decade, which was accompanied by equally impressive growth in household income, except in a few first- tier cities. While bottom- income mortgage borrowers endured severe financial burdens by using price- to- income ratios over eight to buy homes, their participation in the housing market remained steady and their mortgage loans were protected by down payments commonly in excess of 35%. As such, the housing market is unlikely to trigger an imminent financial crisis in China, even though it may crash with a sudden stop in the Chinese economy and act as an amplifier of the initial shock. © 2016 by the National Bureau of Economic Research. All rights reserved.
This paper examines the equilibrium price effects of the privatization of housing assets that were previously owned and allocated by the state. I develop a theoretical framework that shows that privatization can have ambiguous effects on prices in the private market, and that the degree of misallocation of the assets prior to privatization determines the subsequent price effects. I test the predictions of the model using a large-scale housing reform in China. The results suggest that the removal of price distortions allowed households to increase their consumption of housing and led to an increase in equilibrium housing prices. (JEL L33, O18, P25, R31, R38)
The price reaction of publicly traded industrial bonds to Moody's Investors Service and Standard & Poor's bond-rating changes is investigated using a database of month-end trader quotes from Lehman Brothers for March 1985 through March 1995. All Standard & Poor's and Moody's rating changes are studied in a period from up to 12 months before the rating change to 12 months after. A unique feature of this study is the use of a data set containing recent firm-specific information that also provides a long event window. Downgraded firms reveal a significant announcement effect in both the announcement month and preannouncement period. The magnitude of downgrading effects increases dramatically as the sample moves from investment-grade to non-investment-grade firms. Samples that are restricted to rating changes that are not preceded by any rerating within six months reveal that the market reacts reliably as much as six months before an event. Upgrade effects are much weaker in magnitude and significance.
The evidence in this paper suggests that downgrades by both Moody's and Standard and Poor's are associated with negative abnormal stock returns in the two-day window beginning the day of the press release by the rating agency. Significant negative abnormal performance can still be detected after eliminating observations containing obvious concurrent (potentially contaminating) news releases. There is little evidence of abnormal performance on announcement of an upgrade. Significant abnormal returns are associated with announcements of additions to the Standard and Poor's Credit Watch List, if either a potential downgrade or a potential upgrade is indicated.
The authors examine the reaction of common stock returns to bond rating changes. While recent studies find a significant negative stock response to downgrades, they argue that this reaction should not be expected for all downgrades because some rating changes are anticipated by market participants and downgrades because of an anticipated move to transfer wealth from bondholders to stockholders should be good news for stockholders. The authors find that downgrades associated with deteriorating financial prospects convey new negative information to the capital market but that downgrades due to changes in firms' leverage do not. Copyright 1993 by American Finance Association.
The 2008/9 financial crisis highlighted the importance of evaluating vulnerabilities owing to interconnectedness, or Too-Connected-to-Fail risk, among financial institutions for country monitoring, financial surveillance, investment analysis and risk management purposes. This paper illustrates the use of balance sheet-based network analysis to evaluate interconnectedness risk, under extreme adverse scenarios, in banking systems in mature and emerging market countries, and between individual banks in Chile, an advanced emerging market economy.
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