A comparative study of wealth effects of China's bond markets - the empirical analysis based on co-integration and ECM and state space model

Since the concept of wealth effect was introduced, scholarly studies mainly focus on the stock markets and the real estate markets, and less on bond markets. Given China’s bond market is divided into the interbank bond market and exchange bond market, firstly, we use co-integration and error correction models to test the static wealth effect of the two markets, find that there are significant long-term wealth effects, while the short-term wealth effects are not obvious. Compared with the exchange bond market, the wealth effect of the interbank bond market is higher than it. Then, we use state space models to test the dynamic wealth effect of the two markets, the results show that they are both obvious, and the interbank bond market’s is higher, but the gap diminishes gradually. In view of the significant wealth effect difference between the two markets, we suggest that China unify the two bond markets in order to bring the bigger wealth effect.