Quantifying Information Asymmetry in the Corporate Bond Market

50 Pages Posted: 14 Apr 2020 Last revised: 19 Oct 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 model to quantify the effects of informational and noninformational frictions in corporate bond markets. We decompose the liquidity premium on corporate bonds into two parts: one caused by information asymmetry among bond investors and the other caused by some noninformational frictions. The bond turnover ratio is endogenously determined and is matched to the observed turnover ratios across different rating classes. Information asymmetry accounts for 0.97% to 9.67% of the yield spreads as the corresponding credit rating declines from AAA to B. The benefits to bond investors from liquidity injection can be eclipsed by the costs to taxpayers.

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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