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Informed Trading and Momentum in the Corporate Bond Market
[Asset pricing with liquidity risk]

Author

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  • Lifang Li
  • Valentina Galvani

Abstract

Taking advantage of the different trading behaviors of investors on same-issuer bonds, we show that informed trading lies at the core of the momentum effect for corporate bonds. We split the firm-level bond cross-section into top (nontop) bonds that are characterized by higher (lower) volumes of institution-sized trades. We show that top bonds attract more informed trading and transmit information faster than nontop bonds. We design specific top and nontop bond momentum strategies to capitalize on this informational heterogeneity. The results indicate that fast news spreading yields short-lived momentum in top bonds, whereas momentum in nontop bonds is strong and drawn-out due to slow information diffusion. These differences are concentrated in bond-level information-intensive periods and are not explained by differences in liquidity levels, systematic risk (including liquidity risk), bond characteristics, and market states. In particular, bond-level liquidity affects the momentum effect only by altering the rate at which news spreads.

Suggested Citation

  • Lifang Li & Valentina Galvani, 2021. "Informed Trading and Momentum in the Corporate Bond Market [Asset pricing with liquidity risk]," Review of Finance, European Finance Association, vol. 25(6), pages 1773-1816.
    • Handle: RePEc:oup:revfin:v:25:y:2021:i:6:p:1773-1816.
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    File URL: http://hdl.handle.net/10.1093/rof/rfab004
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    2. Galvani, Valentina & Li, Lifang, 2023. "Outliers and momentum in the corporate bond market," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 135-148.
    3. James Brugler & Carole Comerton-Forde & J Spencer Martin, 2022. "Secondary Market Transparency and Corporate Bond Issuing Costs [Asset pricing and the bid–ask spread]," Review of Finance, European Finance Association, vol. 26(1), pages 43-77.
    4. Ivashchenko, Alexey, 2024. "Corporate bond price reversals," Journal of Financial Markets, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Momentum effect; asymmetric information; informed trading; liquidity; corporate bonds; corporate bond informational heterogeneity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G40 - Financial Economics - - Behavioral Finance - - - General

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