Quantifying Information Asymmetry in the Corporate Bond Market
46 Pages Posted: 14 Apr 2020 Last revised: 30 Jul 2021
Date Written: March 18, 2020
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: Suggested Citation