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  • Short Selling and Price Discovery in Corporate Bonds

    Rights statement: 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.

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    Available under license: CC BY: Creative Commons Attribution 4.0 International License

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Short Selling and Price Discovery in Corporate Bonds

Research output: Contribution to journalJournal article

E-pub ahead of print
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<mark>Journal publication date</mark>1/02/2020
<mark>Journal</mark>Journal of Financial and Quantitative Analysis
Issue number1
Volume55
Number of pages39
Pages (from-to)77-115
Publication statusE-pub ahead of print
Early online date3/12/18
Original languageEnglish

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.

Bibliographic note

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.