Corporate bond price reversals

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Abstract

I demonstrate empirically that corporate bond dealers mitigate adverse selection risk by passing potentially informed transactions to institutional investors. I contrast price reversals following days with abnormal trading volume across bonds with different information asymmetry. In informed trading, the part of reversal specific to high-volume days should increase with information asymmetry. In uninformed trading, there is no such effect. Following high-volume days when investors provide liquidity, the reversals are consistent with the former case. When dealers provide liquidity, I observe the latter. The results suggest that the informational content of bond prices is higher when dealers do not take inventory.

Original languageEnglish
Article number100880
Number of pages20
JournalJournal of Financial Markets
Volume68
Issue numberMarch
DOIs
Publication statusPublished - Mar 2024

Bibliographical note

Publisher Copyright:
© 2023 The Author(s)

Keywords

  • Corporate bonds
  • Dealer inventory
  • Informed trading
  • Reversal
  • Trading volume

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