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Price Discovery in the Stock and Corporate Bond Markets

Author
Mao, Yifei
Abstract
This paper uses intraday U.S. bond transaction and stock quote data to investigate whether corporate bonds lead stocks in price discovery of underlying firm value. I use Hasbrouck's (1995) “information share" approach to determine the relative contribution of corporate bond to price discovery. Based on a sample of 214 firms, I find that corporate bond markets contribute 12.6% on average to price discovery from 2009 to 2011. Corporate bond market price discovery increases with the riskiness of the under-lying firm value, and is related to contemporaneous market conditions. The findings are consistent with the informed trading theory and Merton (1973) model.
Date Issued
2012-10-31Subject
price discovery; information share; corporate bond
Rights
Required Publisher Statement: Copyright held by the author.
Type
preprint