Price Discovery in the Stock, OTC Corporate Bond, and NYSE Corporate Bond Markets

Authors

Craig W. Holden, Indiana University - Kelley School of Business - Department of FinanceFollow
Xin Liu, School of Finance, Renmin University of ChinaFollow
Yifei Mao, Cornell University - SC Johnson College of Business - Finance DepartmentFollow
Jayoung Nam, Southern Methodist University (SMU) - Finance DepartmentFollow

Publication Date

6-9-2018

Abstract

This paper examines intraday price discovery in three closely-related U.S. markets: stocks, Over-The-Counter (OTC) corporate bonds, and New York Stock Exchange (NYSE) electronically-traded corporate bonds. We calculate the Hasbrouck (1995) information shares of these three markets over five years. We find that OTC corporate bond trades have a 5.7% information share, despite zero pre-trade transparency in the OTC market. Further, NYSE corporate bonds have a 45.8% information share, despite having a tiny market share, because of publicly-displayed, frequently-updated bid-ask quotes that can be traded at any time. OTC corporate bond information shares are inversely related to credit quality and are relatively constant over time. This is consistent with multi-security informed trading theory and the Merton (1974) corporate bond model. NYSE corporate bond information shares are positively related to their update frequency. Thus, the subset of NYSE bonds that are updated more frequently are more informative.

Document Type

Article

Keywords

Price Discovery, Information Share, Corporate Bond, OTC, NYSE

Disciplines

Finance

DOI

10.2139/ssrn.3193653

Source

SMU Cox: Finance (Topic)

Language

English