Trade and information in the corporate bond market

Capital Commitment and Illiquidity in Corporate Bonds

“…The results in Table also show that trade execution costs are lower for young bonds, which is broadly consistent with the well‐documented “on‐the‐run” phenomenon, where newly issued Treasury and corporate securities enjoy more liquid markets (Krishnamurthy () and Ronen and Zhou ()). During the January 2006 to June 2007 benchmark period, trading costs averaged 0.23% for young bonds versus 0.44% for older bonds.…”

Informed Trading in Corporate Bonds Prior to Earnings Announcements

“…However, from a game theory perspective, it also makes sense for informed investors to spread their trades among many bonds in order to conceal their information. To gain further insights, we identify the bond that attracts the most institutional trade volume around earnings announcements as the “top bond” for each firm/ announcement, as in Ronen and Zhou () (see also Mahanti et al. , for the impact of institutional trading on bond liquidity) .…”

“…Earlier studies rely on the vector autoregression (VAR) modes to determine the lead‐lag relationship between stocks and bonds in incorporating firm specific information, and found conflicting results . The special institutional features of the corporate bond market have led Ronen and Zhou () to question the ability of the VAR approach in capturing the dynamics of information revelation and argue in favor of event studies for cross‐market comparisons. By examining the information content of bond trading prior to earnings announcements, our study complements Ronen and Zhou () and suggests that VAR and pair‐wise comparisons between the time‐series of bond and stock prices might not be effective in fully revealing the relative informational efficiency of the stock and corporate bond markets.…”

“…Finally, our study contributes to the literature on the relevance of earnings information for the credit markets. Empirical studies have documented significant bond market reactions to earnings announcements (Datta and Dhillion, ; Hotchkiss and Ronen, ; Ronen and Zhou, ). By focusing on the information content of trading activities before earnings announcements, our study suggests that the earnings impact on bond prices might have been even larger than previously documented, because the trading by informed traders has incorporated some information into the prices prior to the public announcements.…”

“…Warga (), and Ronen and Zhou () define institutional trades as those that are above $500,000 in par value. Other studies have used $100,000 to define an institutional trade (see, for example, Edwards et al., ; Goldstein et al., ).…”