Informed and strategic order flow in the bond markets

No 874, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study the role played by private and public information in the process of price formation in the U.S. Treasury bond market. To guide our analysis, we develop a parsimonious model of speculative trading in the presence of two realistic market frictions -- information heterogeneity and imperfect competition among informed traders -- and a public signal. We test its equilibrium implications by analyzing the response of two-year, five-year, and ten-year U.S. bond yields to order flow and real-time U.S. macroeconomic news. We find strong evidence of informational effects in the U.S. Treasury bond market: unanticipated order flow has a significant and permanent impact on daily bond yield changes during both announcement and non-announcement days. Our analysis further shows that, consistent with our stylized model, the contemporaneous correlation between order flow and yield changes is higher when the dispersion of beliefs among market participants is high and public announcements are noisy.

Keywords: bond markets; Bonds (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cse and nep-mst
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Citations: View citations in EconPapers (21)

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Journal Article: Informed and Strategic Order Flow in the Bond Markets (2007)
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