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 language | English |
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Article number | 100880 |
Number of pages | 20 |
Journal | Journal of Financial Markets |
Volume | 68 |
Issue number | March |
DOIs | |
Publication status | Published - Mar 2024 |
Bibliographical note
Publisher Copyright:© 2023 The Author(s)
Keywords
- Corporate bonds
- Dealer inventory
- Informed trading
- Reversal
- Trading volume