Illiquidity Meets Intelligence: AI-Driven Price Discovery in Corporate Bonds

Authors

Stacey E. Jacobsen, Southern Methodist University (SMU) - Finance DepartmentFollow
Kumar Venkataraman, Southern Methodist University (SMU) - Finance DepartmentFollow
David X Xu, Southern Methodist University (SMU) - Finance DepartmentFollow

Publication Date

6-15-2025

Abstract

We study the contribution of AI-generated reference prices to intraday price discovery in markets with infrequent trading. Using corporate bond transactions and MarketAxess CP+ quotes, we find that CP+ is more informative about future trade prices than the last trade. Regression results show that CP+ quote updates reflect market-wide movements in bond, equity, and options markets, and bond-specific non-public information from the RFQ process. CP+ provides broad coverage across bonds. Its contributions exhibit a bell-shaped relationship with liquidity. Following a trade report, CP+ updates quickly in the direction of the trade, limiting its contribution during transitory price shocks.

Document Type

Article

Keywords

Artificial Intelligence, Corporate Bonds, Reference Prices, Price Discovery

Disciplines

Finance

Source

SMU Cox: Finance (Topic)

Language

English