Price Discovery in the Stock, OTC Corporate Bond, and NYSE Corporate Bond Markets

36 Pages Posted: 24 Jun 2018 Last revised: 30 Oct 2022

See all articles by Craig W. Holden

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Xin Liu

School of Finance, Renmin University of China

Yifei Mao

Cornell University - SC Johnson College of Business - Finance Department

Jayoung Nam

Southern Methodist University (SMU) - Finance Department

Date Written: June 9, 2018

Abstract

This paper examines intraday price discovery in three closely-related U.S. markets: stocks, Over-The-Counter (OTC) corporate bonds, and New York Stock Exchange (NYSE) electronically-traded corporate bonds. We calculate the Hasbrouck (1995) information shares of these three markets over five years. We find that OTC corporate bond trades have a 5.7% information share, despite zero pre-trade transparency in the OTC market. Further, NYSE corporate bonds have a 45.8% information share, despite having a tiny market share, because of publicly-displayed, frequently-updated bid-ask quotes that can be traded at any time. OTC corporate bond information shares are inversely related to credit quality and are relatively constant over time. This is consistent with multi-security informed trading theory and the Merton (1974) corporate bond model. NYSE corporate bond information shares are positively related to their update frequency. Thus, the subset of NYSE bonds that are updated more frequently are more informative.

Keywords: Price Discovery, Information Share, Corporate Bond, OTC, NYSE

JEL Classification: G14

Suggested Citation

Holden, Craig W. and Liu, Xin and Mao, Yifei and Nam, Jayoung, Price Discovery in the Stock, OTC Corporate Bond, and NYSE Corporate Bond Markets (June 9, 2018). Kelley School of Business Research Paper No. 18-53, Available at SSRN: https://ssrn.com/abstract=3193653 or http://dx.doi.org/10.2139/ssrn.3193653

Craig W. Holden (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
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Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)

HOME PAGE: http://www.kelley.iu.edu/cholden

Xin Liu

School of Finance, Renmin University of China ( email )

Room 307A
Mingde Main Building, Renmin University of China
Beijing, Beijing 100872
China

Yifei Mao

Cornell University - SC Johnson College of Business - Finance Department ( email )

Ithaca, NY 14850
United States

Jayoung Nam

Southern Methodist University (SMU) - Finance Department ( email )

United States

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