Сorporate Bond Price Reversals

Abstract

I demonstrate empirically that corporate bond dealers mitigate adverse selection risk by passing potentially informed transactions to institutional investors that become liquidity providers to informed traders. I obtain these results by contrasting price reversals following days with abnormal trading volume across bonds with different information asymmetry. When traders are informed, the part of the price reversal that arises after high-volume days should increase with bond information asymmetry. When traders are uninformed, there should be no such effect. Following high-volume days when investors provide liquidity, the reversal patterns are consistent with the former case. When dealers trade from their inventory, I observe the latter. The results suggest that the informational content of bond prices is higher on high-volume days when dealers do not accept overnight inventory risk.

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