Corporate Bond Price Data Sources and Return/Risk Measurement

To date, a number of studies involving the use of bond prices and/or returns have utilized the published prices of trades on the New York and other exchanges. These exchange quotes reflect the odd-lot activities of individual investors and account for only a negligible portion of the trading in listed issues. In contrast, the vast majority of listed corporate trading occurs over-the-counter and involves round-lot trades between institutions. Given differences in market characteristics, odd-lot exchange prices may differ substantially from those in the round-lot institutional market. This study compares exchange quotations from Moody's <italic>Bond Record</italic> with prices assigned by Merrill Lynch's institutional pricing service and uses each set of prices to calculate return and risk measures. Institutional (Merrill Lynch) bond prices are shown to be systematically greater than exchange (Moody's) prices. In addition, bond returns based on Merrill Lynch prices are shown to yield significantly higher beta and R² estimates, as well as significantly lower standard deviation and residual risk estimates.