Price Discovery in the Stock and Corporate Bond Markets
36 Pages Posted: 8 Oct 2012 Last revised: 13 May 2014
Date Written: November 24, 2012
Abstract
This paper uses intraday U.S. bond transaction and stock quote data to investigate whether corporate bonds lead stocks in price discovery of underlying firm value. I use Hasbrouck's (1995) "information share" approach to determine the relative contribution of corporate bonds to price discovery. Based on a sample of 214 firms, I find that corporate bond markets contribute 12.6% on average to price discovery from 2009 to 2011. Corporate bond market price discovery increases with the riskiness of the underlying firm value, and is related to contemporaneous market conditions. The findings are consistent with the informed trading theory and Merton (1973) model.
Keywords: Price Discovery, Information Share, Corporate Bond
Suggested Citation: Suggested Citation
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