Bond Lending and the Law of One Price in China's Treasury Markets

Magnani, Jacopo and Wang, Yabin (2020): Bond Lending and the Law of One Price in China's Treasury Markets.

Abstract

This paper examines how the introduction of bond lending in China's bond market has affected violations of the law of one price, measured by the yield spread between similar treasury bonds. To identify the effect of bond lending, we exploit the fact that in China identical bonds are traded on two segmented markets and bond lending has been introduced in only one of the two markets. We find that the introduction of bond lending has led to a decline in deviations from the law of one price. Consistent with an interpretation based on limits to arbitrage, a significant fraction of the deviations from the law of one price in our sample represent actual profit opportunities and the introduction of bond lending has reduced arbitrage profits.

• Item Type: MPRA Paper
• Language: English
• Keywords: China's bond markets, bond lending, law of one price
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation

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