Informed Trading in Corporate Bonds Prior to Earnings Announcements

49 Pages Posted: 16 Mar 2012  

Jason Zhanshun Wei

University of Toronto - Rotman School of Management

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System

Date Written: January 31, 2012

Abstract

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.

Keywords: Informed trading, trade imbalance, corporate bond market, earnings surprises

JEL Classification: G14

Suggested Citation

Wei, Jason Zhanshun and Zhou, Xing (Alex), Informed Trading in Corporate Bonds Prior to Earnings Announcements (January 31, 2012). Available at SSRN: https://ssrn.com/abstract=2023494 or http://dx.doi.org/10.2139/ssrn.2023494

Jason Zhanshun Wei (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-978-3698 (Phone)
416-971-3048 (Fax)

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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