–°orporate Bond Price Reversals [Job Market Paper]


There are strong reversals in U.S. corporate bond prices that become less pronounced following high trading volume days. Among bonds with similar illiquidity and riskiness, the effect is the strongest for bonds with high information asymmetry and when high trading volumes do not lead to big changes in dealers end-of-day inventory. The finding suggests that some corporate bond investors trade on private information, but dealers let other clients provide liquidity to informed investors. The empirical results are in line with the predictions of a theoretical model in which investors trade for liquidity reasons and on private news that arrive independently from changes in inventory. The results have implications for reversal investment strategies and recent bond market regulatory proposals.