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

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 previous literature, we employ comprehensive transactions data for both classes of securities. We find that hourly stock returns lead bond returns for non-convertible junk- and BBB-rated bonds, and that stock returns lead bond returns for convertible bonds in all rating classes. Most of the non-convertible bonds that are predictable are issued by companies in financial distress, while the convertible bonds that are predictable are those with conversion options more highly 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.

Keywords: Stock-bond relationship, Lead-lag relationship, Firm-specific information, Market efficiency

JEL Classification: G12, G14