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Policy signals, credibility and market expectations: Evidence from the Chinese bond market

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  • Li, Na
  • Feng, Meile
  • Liu, Rong

Abstract

Based on Chinese bond market transaction data, we study the effects of the Chinese Zeroing Hidden Debt (ZHD) policy on non-pilot regions in 2021 from a market guarantee expectations viewpoint. We find that the market selectively believes more in the bailout signal released by the ZHD pilot than in no-bailout signal, leading to an increase in implicit guarantee expectations instead of a decrease, which is contrary to the original policy intention. And it also has the heterogeneity of this selective belief psychology. We reveal that the market's trust in policy signals distorts policy effects.

Suggested Citation

  • Li, Na & Feng, Meile & Liu, Rong, 2023. "Policy signals, credibility and market expectations: Evidence from the Chinese bond market," Finance Research Letters, Elsevier, vol. 58(PA).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323007596
    DOI: 10.1016/j.frl.2023.104387
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    References listed on IDEAS

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    4. Cabrera, Matias & Dwyer, Gerald P. & Samartín-Saénz, Margarita, 2016. "Government finances and bank bailouts: Evidence from European stock markets," Journal of Empirical Finance, Elsevier, vol. 39(PB), pages 169-179.
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    More about this item

    Keywords

    Policy signals; Credibility; Market guarantee expectations; Asymmetric effects;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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