The Relative Informational Efficiency of Stocks and Bonds: An Intraday Analysis

37 Pages Posted: 5 Oct 2006

Multiple version iconThere are 2 versions of this paper

Date Written: August 20, 2007

Abstract

In light of recent improvements in the transparency of the corporate bond market, we examine the relation between high frequency returns on individual stocks and bonds. In contrast to the previous literature, we employ comprehensive transactions data for both classes of securities. We find that hourly stock returns lead bond returns for non-convertible junk- and BBB-rated bonds, and that stock returns lead bond returns for convertible bonds in all rating classes. Most of the non-convertible bonds that are predictable are issued by companies in financial distress, while the convertible bonds that are predictable are those with conversion options deeply in-the-money. These results indicate that the corporate bond market is less informationally efficient than the stock market, notwithstanding the recent improvements in bond market transparency and associated reductions in corporate bond transaction costs.

Keywords: Stock-bond relationship, Lead-lag relationship, Firm-specific information, Market efficiency

JEL Classification: G12, G14

Suggested Citation

Downing, Christopher T. and Underwood, Shane and Xing, Yuhang, The Relative Informational Efficiency of Stocks and Bonds: An Intraday Analysis (August 20, 2007). Available at SSRN: https://ssrn.com/abstract=850229 or http://dx.doi.org/10.2139/ssrn.850229

Christopher T. Downing

BlackRock ( email )

400 Howard Street
San Francisco, CA 94105
United States

Shane Underwood (Contact Author)

Baylor University ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4524 (Phone)

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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