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The Relative Informational Efficiency of Stocks and Bonds: An Intraday Analysis

Published online by Cambridge University Press:  01 October 2009

Chris Downing ,
Shane Underwood  and
Yuhang Xing
Chris Downing
Affiliation:
Barclays Global Investors, 45 Fremont St., San Francisco, CA 94105. ctdowning@gmail.com
Shane Underwood
Affiliation:
Culverhouse College of Commerce, University of Alabama, 361 Stadium Dr., Tuscaloosa, AL 35487. seunderwood@cba.ua.edu
Yuhang Xing
Affiliation:
Jones Graduate School of Management, Rice University, 6100 Main St., Houston, TX 77005. yxing@rice.edu
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Abstract

In light of recent improvements in the transparency of the corporate bond market, we examine the relation between high frequency returns on individual stocks and bonds. In contrast to the authors of previous literature, we employ comprehensive transactions data for both classes of securities. We find that hourly stock returns lead bond returns for nonconvertible junk- and BBB-rated bonds, and that stock returns lead bond returns for convertible bonds in all rating classes. Most of the predictable nonconvertible bonds are issued by companies in financial distress, while the predictable convertible bonds are those with conversion options more deeply in-the-money. These results indicate that the corporate bond market is less informationally efficient than the stock market, notwithstanding the recent improvements in bond market transparency and associated reductions in corporate bond transaction costs.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 5 , October 2009 , pp. 1081 - 1102
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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