Informed Trading in Corporate Bonds Prior to Earnings Announcements
Jason Zhanshun Wei
University of Toronto - Rotman School of Management
Board of Governors of the Federal Reserve System
January 31, 2012
This paper examines the information contents of trading activities in the corporate bond market prior to earnings announcements. We find that the direction of pre-announcement bond trading is significantly related to earnings surprises. Such linkage is most evident prior to negative news and in high-yield bonds. Further, abnormal bond trading during the pre-announcement period can help predict post-announcement bond returns. Such predictive power of bond trading largely originates from institutional sized trades, and it is concentrated in the issuer’s most actively traded bond. Lastly, even after accounting for transactions costs, informed bond trading can generate significant net profits, especially prior to the release of bad news.
Number of Pages in PDF File: 49
Keywords: Informed trading, trade imbalance, corporate bond market, earnings surprises
JEL Classification: G14
Date posted: March 16, 2012
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