Optimal bond issuance with cost and liquidity constraints for Chinese local governments: a multi-period stochastic programming approach

In recent years, China’s local governments have issued numerous bonds to support the country’s economic development. However, as total debt accumulates, the pressure on debt repayments is gradually increasing. To increase the sustainability of local government debt, we propose a multi-period stochas...

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Bibliographic Details
Published in:Empirical economics Vol. 63; no. 5; pp. 2605 - 2632
Main Authors: Yang, Ruicheng, Li, Li, Jiang, Qi, Qi, Ji
Format: Journal Article
Language:English
Published: Berlin/Heidelberg Springer Berlin Heidelberg 01.11.2022
Springer Nature B.V
Subjects:
Bond portfolios
Constraints
Costs
Debt
Deviation
Econometrics
Economic development
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Finance
Insurance
Liquidity
Local government
Management
Optimization
Portfolios
Public debt
Repayments
Risk
Statistics for Business
China
Bond cost
Local government bonds
Liquidity risk
Stochastic programming
ISSN:0377-7332, 1435-8921
Online Access:Get full text
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Summary:In recent years, China’s local governments have issued numerous bonds to support the country’s economic development. However, as total debt accumulates, the pressure on debt repayments is gradually increasing. To increase the sustainability of local government debt, we propose a multi-period stochastic optimization-based approach to determining the portfolio composition of issued bonds, with the goal of minimizing the expected cost under the constraints of liquidity risk and cost deviation risk. Liquidity risk is measured by conditional payment-at-risk ( CPaR ), and cost deviation risk is measured by conditional value-at-risk ( CVaR ). By bounding CVaR and CPaR , local governments can control the levels of cost deviation risk and liquidity risk. To alleviate future liquidity risk, which is caused by the issuance of a large number of long-term bonds to deliberately reduce repayment pressure within a debt planning horizon, we consider an extended liquidity planning horizon to manage both current and future liquidity risk. Based on this, we analyze the efficient frontier and portfolio compositions of issued bond under the constraints of different CVaR and CPaR levels. Compared with actual Chinese local government bond portfolios, the efficient frontier performs better for different issuance strategies.
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ISSN:0377-7332
1435-8921
DOI:10.1007/s00181-022-02210-y