What Does the Bond Market Know?
45 Pages Posted: 24 Feb 2011
Date Written: February 21, 2011
Do smaller, less liquid markets help predict prices in more liquid related markets? Using TRACE data for 2002-08 for 1,167 bonds issued by 442 firms, we find that a decline of 10% over three months of a firm’s bonds is associated with an ensuing decline of 3% to 6% in its stock. Bond price increases do not have a similar effect. Possible explanations for the lead of bond prices over stocks include the focus of bond analysts on negative news, the use of credit-default swaps as venues for informed trading, and the incomplete adjustment of stock prices to new information.
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