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The Informational Role of Stock and Bond Volume

Kerry Back1; Kevin Crotty2

1 Jones Graduate School of Business and Department of Economics, Rice University · 2 Jones Graduate School of Business, Rice University

Review of Financial Studies 2015

In a Kyle (1985) model, the sign of the correlation between a firm's debt and equity returns is the same as the sign of the cross-market Kyle's lambda. The sign is positive (negative) if private information concerns the mean (risk) of the firm's assets. We show empirically that information conveyed by order flows is primarily about asset means. The cross-market lambdas are quite large; consequently, the portions of bond and stock returns explained by order flows are highly correlated, even though the order flows themselves are virtually uncorrelated.

DOI
10.1093/rfs/hhu094
Volume
28 (5)
Pages
1381-1427
Language
en
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