What Does the Corporate Bond Market Know?
41 Pages Posted: 11 Aug 2012
Date Written: August 10, 2012
Do smaller, less liquid markets help predict prices in more liquid related markets? Using TRACE bond trade data for 1,958 bonds issued by 663 firms, we find that a decline of 10% in a firm’s bonds over one month is associated with a decline of 2.1% in its stock the following month. The coefficient is larger for firms with volatile stock, for more liquid and high-yield bonds, for zero-coupon bonds, and for bond price declines. These results support the view that informed trading may take place first in the less liquid market and that new information is often transmitted across related markets with a substantial lag.
Keywords: capital markets, market efficiency, bonds
JEL Classification: G12, G14
Suggested Citation: Suggested Citation