Where did all the Information Go? Trade in the Corporate Bond Market

This paper presents strong evidence of bond market efficiency with special emphasis on establishing parameters for conducting corporate bond market specific analysis. While retail trades display quick reactions to firm specific information, institutional ones react within the shortest time horizons considered (5 minutes). Speed of adjustment tests indicate that corporate bond trades often fully incorporate all information in earnings surprises before significant stock reactions occur. We show that the corporate bond market serves an important venue for information-based trading, particularly when equity market liquidity is low. BBB-rated bonds are shown to react with speeds akin to those of higher yield bonds, seemingly anticipating future downgrades. Further, shifting information-based trading across bonds issued by the same firm proves of import. We establish the existence of bond ‘price leaders’, which are characterized by specific maturity, age and complexity. We reconcile previous mixed stock/bond lead-lag conclusions by showing how stock leads can be erroneously inferred when bond specific features and trading patterns are not accounted for. Inference reversals indicate that stocks do not necessarily lead bonds.