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Corporate Bond Price Reversals

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Author
Alexey Ivashchenko
Category
Financial
Date Posted
2019/10/31
Date Retrieved
2022/09/23
Date Revised
Date Written
2022/09/22
Description
I demonstrate that U.S. 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 in a theoretically-motivated empirical setup that contrasts corporate bond price reversals in bonds with different information asymmetry trading volume and dealers capital commitment. I find strong price reversals that become less pronounced following high-trading-volume days. The effect is the strongest when dealers end-of-day inventory does not change and when information motives for trading are the most acute: in bonds with the highest information asymmetry and before issuers earnings announcements. The results suggest that private information reveals itself in prices on high-volume days when dealers do not accept overnight inventory risk.
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JEL Classifications
G12 G14
Keywords
corporate bonds trading volume reversal informed trading dealer inventory
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Pages
65
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URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4227832
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