Information Flows in Trading Networks

Abstract

We study the informational value of trading networks in over-the-counter (OTC) markets. Using detailed transaction-level data from the corporate bond market, we show that investors with larger dealer networks make superior trading decisions before changes in credit fundamentals and yield better risk-adjusted performance. We trace these investors' superior trading decisions to trading connections where dealers are most likely to have access to novel credit-relevant information, supporting the interpretation that these investors obtain private information through their larger trading networks. Collectively, our evidence highlights the importance of trading relationships for investors' private information acquisition.

Edward M. Watts

Assistant Professor of Accounting

Edward Watts is an Assistant Professor of Accounting at the Yale School of Management.