This paper examines the relation between momentum in equities and corporate bonds. The market for corporate bonds is large, both in size and breadth; indeed, at the of end of 1996, according to the Lehman Fixed Income Database (LIFB), there were more than 1,500 investment grade bonds (rating of BBB or higher) trading with an aggregate face value exceeding 250 billion dollars. Yet, there are relatively few studies examining the cross-sectional predictability of returns in the corporate bond market.
International differences in national price levels and prices of individual products are striking and have persisted over long periods, despite the presumed equalizing influence of international trade and despite the liberalization of trade and reduction of transport costs that have occurred. For example, prices in Japan in the 1980s and 1990s were 40 percent higher, on average, than for the OECD countries as a group. In the Nordic countries and Switzerland, prices were 15 to 25 percent higher. In the United States, by contrast, prices were 10 percent lower, and in Portugal 20 percent lower than the OECD average.
In theory, security markets are natural monopolies because of the so-called virtuous circle of liquidity. Traders choose the market with the best liquidity, and the most liquid market is the one with most participants because it offers the highest probability of order execution and the most competitive prices (Mendelson, 1987). As a result, the market with the greatest number of traders attracts all other traders, so that the order flow should inevitably consolidate in a single market (Pagano, 1989). Nevertheless, in practice, equity trading is anything but consolidated.
