Two Essays on the Consequences of Bond Market Transparency

兩篇關於債券市場透明度後果的論文

Student thesis: Doctoral Thesis

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Award date12 Jun 2020

Abstract

Prior studies investigate the information spillover effect across various markets (stocks, bonds, CDS, options and so on). While it is well documented that there exists information spillover from the stock market to the bond market, there is little literature investigating the information spillover from the bond market to the stock market. Researchers and practitioners initially believe the stock market is more efficient, and the information is more quickly revealed in the stock market. However, the bond market may be more responsive to bad news, since bond investors have asymmetric payoff function and as a result, they care more about bad news. Based on this intuition, I study the consequences of increased bond market transparency, providing the evidence on the spillover effect from the bond market to the stock market.

The first chapter investigates whether the impact of bond market transparency on bad news dissemination spills over to equity market and consequently constraints bad news hoarding. Utilizing the Trade Reporting and Compliance Engine (TRACE) implementation setting as an exogenous shock to bond market transparency, I provide strong and reliable evidence that improved bond market transparency contributes to a lower price crash risk in the stock market. Further analysis shows that the accelerated revelation of bad news in the bond market and the spillover of bad news from the bond market into the stock market are two major mechanisms through which bond market transparency reduces stock price crash risk. I also find that the negative effect of bond market transparency on stock price crash risk is more pronounced for bonds with higher default risk and for firms with more opaque information environments. Overall, my findings suggest that increased bond market transparency following the TRACE implementation engenders positive externality in reducing the likelihood of a crash occurrence in the stock market.

The second chapter studies the effect of bond market transparency on insider trading. Utilizing the staggered dissemination of bond transactions via the Trade Reporting and Compliance Engine (TRACE) system as an exogenous shock to bond market transparency, I find that increased bond market transparency leads to lower profitability of insider trading in the stock market. This negative effect is more pronounced for firms with more opaque information environment and firms with higher expected litigation costs, consistent with the role of bond market transparency in reducing the information advantage of insiders and constraining insiders’ incentives to profit from informed trades. Overall, my study provides new insights into the informational role of the bond market following the TRACE implementation.

    Research areas

  • TRACE, Bond market transparency, Information spillover, Bad news dissemination, Stock price crash risk, Insider trading profitability