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Asymmetric Information, Predictability and Momentum in the Corporate Bond Market

Valentina Galvani and Lifang Li ()
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Lifang Li: University of Alberta, Department of Economics, Postal: 8-14 HM Tory Building, Edmonton, AB, T6G 2H4

No 2018-17, Working Papers from University of Alberta, Department of Economics

Abstract: We show that firm-level cross-asset predictability for bonds with a high incidence of informed trading is mostly driven by information diffusion. In contrast, the activities of uninformed investors dominate in originating predictability for the remaining bonds in the firm-level cross-section. Capitalizing on these results, we explore the role of informed and uninformed trading in determining the momentum effect. We find that gradual information diffusion is the main driver of short-term momentum. However, the effect of uninformed trading may outweigh that of information in generating large momentum returns, as it is the case for private-issuer bonds.

Keywords: asymmetric information; informed trading; uninformed trading; predictability; momentum; corporate bonds (search for similar items in EconPapers)
JEL-codes: G10 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-fmk
Date: 2018-11-01
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