Illiquidity Meets Intelligence: AI-Driven Price Discovery in Corporate Bonds
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 analysis shows that CP+ quote updates are systematically related to market-wide movements in bond, equity, and options markets, as well as bond-specific non-public information from the RFQ process. CP+ provides broad coverage across bonds and trading days. Its contribution to price discovery exhibits a bell-shaped relationship with liquidity and increases under market uncertainty. Following a trade report, CP+ updates quickly in the direction of the trade. We show that this can limit its contribution during periods driven by large transitory price shocks.
Document Type
Article
Keywords
Artificial Intelligence, Corporate Bonds, Reference Prices, Price Discovery
Disciplines
Finance
DOI
10.2139/ssrn.5297667
Source
SMU Cox: Finance (Topic)
Language
English
