Short Selling and Price Discovery in Corporate Bonds

Hendershott, Terrence and Kozhan, Roman and Raman, Vikas (2020) Short Selling and Price Discovery in Corporate Bonds. Journal of Financial and Quantitative Analysis, 55 (1). pp. 77-115. ISSN 0022-1090

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Abstract

We show short selling in corporate bonds forecasts future bond returns. Short selling predicts bond returns where private information is more likely, in high-yield bonds, particularly after Lehman Brothers’ collapse of 2008. Short selling predicts returns following both high and low past bond returns. This, together with short selling increasing following past buying order imbalances, suggests short sellers trade against price pressures as well as trade on information. Short selling predicts bond returns both in the individual bonds that are shorted and in other bonds by the same issuer. Past stock returns and short selling in stocks predict bond returns but do not eliminate bond short selling predicting bond returns. Bond short selling does not predict the issuer’s stock returns. These results show bond short sellers contribute to efficient bond prices and that short sellers’ information flows from stocks to bonds but not from bonds to stocks.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Financial and Quantitative Analysis
Additional Information:
The final, definitive version of this article has been published in the Journal, Journal of Financial and Quantitative Analysis, 55 (1), pp 77-115 2018, © 2018 Cambridge University Press.
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400/1402
Subjects:
ID Code:
127793
Deposited By:
Deposited On:
26 Sep 2018 12:56
Refereed?:
Yes
Published?:
Published
Last Modified:
13 Aug 2020 06:30