The Informational Efficiency of the Corporate Bond Market: What is the Role of Trading Volume?

Abstract

This article investigates the informational efficiency of the corporate bond market by examining whether the technical analysis of volume data can help in predicting the bond return volatility as well as the bond returns itself. To this end, the researcher uses prices and volume data obtained from TRACE for a sample of continuously traded corporate bonds from January 2007 to June 2009. To model volatility, we use a variant of GARCH model and the results show that it is an attractive representation of the daily corporate bond return and volatility. The overall conclusion from the results is that the trading volume data does not help in predicting future bond return volatility. Although such result is consistent with the informational efficiency of the corporate bond market, there is still a possibility that this study suffers from some data problems related to the liquidity issue in the corporate bond market.

Keywords: Corporate Bonds, Volatility, Trading Volume, GARCH, Market Efficiency, TRACE

JEL Classification: G12, G14