Thesis on Information Risks in the Corporate Bonds Market

美國債券市場信息風險研究

Student thesis: Doctoral Thesis

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Award date22 Jun 2018

Abstract

This study uses the transaction data in the corporate bonds market from the Trade Reporting and Compliance Engine (TRACE) database and attempts to answer two important research questions: (1) Is information risk priced in corporate bonds market? (2) Do credit rating changes affect the information asymmetry across the corporate bonds and stocks markets?

Chapter 1 titled “Information Risk and Expected Corporate Bond Returns” studies the effects of information risk on the expected corporate bond returns. I use the microstructure framework, in which information risk is measured through the probability of information-based trading (PIN). I find a strong positive relationship between the expected corporate bond returns and information risk, after controlling for the bond characteristics, liquidity risk, and other variables that may affect the corporate bond returns. This relationship is robust to a wide variety of measurements of information risk and liquidity risk, i.e., AdjPIN, Pastor–Stambaugh liquidity measure, Amihud illiquidity measure, and probability of symmetric order-flow shocks (PSOS). Moreover, the pricing of information risk on the expected corporate bond returns is strong after the public dissemination, and during a financial crisis. The results suggest that information risk is one of the determinants of the expected corporate bond returns.

Chapter 2 titled “Information Asymmetry Across the Corporate Bonds and Stocks Markets”, investigates the information asymmetry between the corporate bond and stocks markets. I find that credit rating changes affect the information asymmetry of trading across the corporate bond and stocks markets. In particular, a credit rating upgrade conveys good news and increases the disclosure, thereby resulting in reduced information asymmetry. Accordingly, a rating downgrade signals bad news, thereby leading to lower disclosure and higher information asymmetry. However, informed traders react differently to credit rating changes across markets. The difference between post- and pre-changes is considerably more pronounced in the stocks market than in the public bonds market. Therefore, stocks are more attractive to informed traders than public bonds, because of the higher liquidity in the stocks market. Moreover, the reactions of the information asymmetry to the credit rating changes for private bonds are more significant than those for public bonds. Hence, the attractions of private bonds for the informed traders are stronger than that of public bonds because of the lower disclosure and higher information asymmetry of private bonds.

This thesis provides new insights into information risk on the pricing of the corporate bonds using the PIN measure estimated via bond transaction data, thereby extending the existing literature. Results confirm that information risk has a significant predictive power of expected corporate bond returns even in the presence of additional factors. To the best of my knowledge, my findings are the first to clarify the information asymmetry across the corporate bonds and stocks markets around the credit rating changes, particularly when considering the behavior of informed traders. This research also provides new evidence for the preference of informed traders between public and private bonds.