Corporate Bond Selection with Option Information

When markets are efficient all available information is quickly incorporated into all asset prices. Markets are, however, not efficient due to disturbances such as transaction costs, liquidity constraints or regulations. The factor investing literature illustrates this market inefficiency by finding significant premiums in asset markets that are different from the traditional asset class premiums. This research contributes further to this literature by applying information from options to construct profitable trading strategies with corporate bonds. This shows that not all available information from the option market is incorporated in the corporate bond market. Furthermore, many insights are provided as to what kind of information can be obtained from the option market. The results of this research reinforce the notion of the option market as an important source of information for investors.