Corporate Bond Price Reversals

65 Pages Posted: 31 Oct 2019 Last revised: 25 Sep 2022

Date Written: September 22, 2022

Abstract

I demonstrate that U.S. corporate bond dealers mitigate adverse selection risk by passing potentially informed transactions to institutional investors that become liquidity providers to informed traders. I obtain these results in a theoretically-motivated empirical setup that contrasts corporate bond price reversals in bonds with different information asymmetry, trading volume, and dealers' capital commitment. I find strong price reversals that become less pronounced following high-trading-volume days. The effect is the strongest when dealers' end-of-day inventory does not change and when information motives for trading are the most acute: in bonds with the highest information asymmetry and before issuers' earnings announcements. The results suggest that private information reveals itself in prices on high-volume days when dealers do not accept overnight inventory risk.

Keywords: corporate bonds, trading volume, reversal, informed trading, dealer inventory

JEL Classification: G12, G14

Suggested Citation

Ivashchenko, Alexey, Corporate Bond Price Reversals (September 22, 2022). Available at SSRN: https://ssrn.com/abstract=3473739 or http://dx.doi.org/10.2139/ssrn.3473739

Alexey Ivashchenko (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

HOME PAGE: http://ivasche.com

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