Quantifying Information Asymmetry in the Corporate Bond Market

46 Pages Posted: 14 Apr 2020 Last revised: 30 Jul 2021

See all articles by Hyun Soo Doh

Hyun Soo Doh

Nanyang Technological University

Yiyao Wang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: March 18, 2020

Abstract

We develop a structural model to quantify the effects of informational and noninformational frictions on bond market liquidity. We decompose the liquidity component of the yield spread into two parts: one caused by information asymmetry between current and new bond investors, and the other caused by noninformational frictions that generate additional transaction costs. Our calibrated model matches the observed turnover ratios across different rating classes. We find that information asymmetry accounts for 0.59% to 1.86% of the yield spread for investment-grade bonds and 3.46% to 11.20% for high-yield bonds. Liquidity injection may hurt market liquidity by inducing more informed trading.

Keywords: corporate bonds, information asymmetry, liquidity, yield-spread decomposition

JEL Classification: G33, G14, G32

Suggested Citation

Doh, Hyun Soo and Wang, Yiyao, Quantifying Information Asymmetry in the Corporate Bond Market (March 18, 2020). Available at SSRN: https://ssrn.com/abstract=3556259 or http://dx.doi.org/10.2139/ssrn.3556259

Hyun Soo Doh (Contact Author)

Nanyang Technological University ( email )

Singapore

Yiyao Wang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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