Where Did All the Information Go? Trade in the Corporate Bond Market
Rutgers, The State University of New Jersey - Department of Finance
Rutgers University, Newark - School of Business - Department of Finance & Economics
March 17, 2010
This paper examines shifting liquidity in the corporate bond market and illustrates how cross market comparisons can lead to misleading inferences regarding market efficiency when liquidity and trading patterns are ignored. For example, when institutional trade dominance and other bond trading features are accounted for, stock leads evidenced in earlier studies are surprisingly reversed. Moreover, bond prices often fully adjust to news before the equity market opens. Informational advantages are most pronounced during low equity market liquidity and price discovery periods. Finally, dynamic liquidity patterns give rise to ‘top bonds’, which are those attracting most institutional sized trades after news and are shown to play an important role in the price discovery process. These bonds shift identity over time but exhibit common ex-ante identifiable characteristics.
Number of Pages in PDF File: 50
Keywords: Bond Market Liquidity, Informational Efficiency, Institutional/Retail Investors, Overnight Information, Cross Market Comparison
JEL Classification: G10working papers series
Date posted: March 22, 2010
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