Information Risk in the Corporate Bond Market

Abstract

This chapter studies the effect of information risk on the expected returns of corporate bonds. The measurement for the information risk is based on the microstructure framework—the probability of information-based trading (PIN). The authors find a significantly positive relation between expected corporate bond returns and information risk, controlling for the effects of other liquidity levels and bond characteristics. This relation is robust to using a variety of informed trading proxies and information risk measures, and controlling for ratings, debt crisis, and different sample periods. The authors’ results strongly suggest that information risk is an important determinant of expected corporate bond returns.