Information-Based Trading in the Junk Bond Market
Department of Applied Economics and Management
Taking advantage of a unique corporate bond transaction dataset from the National
Association of Securities Dealers (NASD), this paper investigates whether
information-based trading takes place in the high-yield corporate bond market, and
how firm-specific information flow across related securities, including stocks, options
and corporate bonds.
Differing from previous studies, I find that current corporate
bond returns have explanatory power for future stock price changes. This implies that
informed investors do trade in the corporate bond market, and both the stock market
and the corporate bond market serve important roles in disseminating new
The option market, however, contains valuable information about future
movements in both stocks and corporate bonds, and these relations are unidirectional,
suggesting that the option market is a preferred venue for informed trading.
Furthermore, there is strong evidence that informed trading in the option market is
distributed across different strike prices, with at-the-money options attracting
investors who posses mild firm-specific information, and deep out-of-the-money
options catching the attention of those who obtain extreme information.
Firm Specific Information, Information-based Trading, Information-risk
Premium, Insider Trading, Junk Bonds, Market Microstructure, Price Discovery.
Department of Applied Economics and Management, Cornell University, 253 Warren Hall, Ithaca NY, 14853.
Phone: (607)351-8374; Email:
I thank NASD for help with the data.
The views expressed
herein are solely those of the author and not those of any other person or entity, including NASD.
I thank Hazem
Daouk, Maureen O’Hara, David Easley and Yongmiao Hong for helpful comments and discussions.
I also thank
Vidhi Chhaochharia, David Ng, Michael Piwowar, and Xiaoyan Zhang for their useful suggestions.
Any errors are