INFORMED TRADING AND ITS IMPLICATIONS FOR COPORATE BOND PRICING
Valuation of corporate debt has been an extremely important, albeit imprecise task in asset pricing. Both structural models and reduced form models have had limited success in explaining the corporate yield spreads observed in actual markets. Taking advantage of a unique corporate bond dataset from the National Association of Securities Dealers, this dissertation investigates whether informed trading takes place in the high-yield corporate bond market, and its implications for corporate bond pricing. Differing from previous studies, I find that current corporate bond returns have explanatory power for future stock price changes. This implies that the corporate bond market serve important roles in disseminating new information. Based on this finding, this dissertation also demonstrates that in addition to liquidity, the amount of information based trading plays an important role in determining yield spreads of risky corporate bonds, which is consistent with the hypothesis that investors require higher return to compensate them for bearing the risks of trading with more informed traders. In line with a strand of recent literature on the implications of market microstructure for asset pricing, this paper suggests that corporate bond yields might embed an information risk premium that is ignored by existing bond pricing models.
Informed Trading; Microstructure
dissertation or thesis