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Economic News and the Impact of Trading on Bond Prices

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  • T. Clifton Green

    (Goizueta Business School, Emory University)

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    Abstract

    This paper studies the impact of trading on government bond prices surrounding the release of macroeconomic news. The results show a significant increase in the informational role of trading following economic announcements, which suggests the release of public information increases the level of information asymmetry in the government bond market. The informational role of trading is greater after announcements with a larger initial price impact, and the relation is associated with the surprise component of the announcement and the precision of the public information. The results provide evidence that government bond order flow reveals fundamental information about riskless rates. Copyright 2004 by The American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 59 (2004)
    Issue (Month): 3 (06)
    Pages: 1201-1234

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    Handle: RePEc:bla:jfinan:v:59:y:2004:i:3:p:1201-1234

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    References

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    1. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1997. "Economic News and the Yield Curve: Evidence from the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-005, New York University, Leonard N. Stern School of Business-.
    2. Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351.
    3. Takatoshi Ito & Richard K. Lyons & Michael T. Melvin, 1997. "Is There Private Information in the FX Market? The Tokyo Experiment," NBER Working Papers 5936, National Bureau of Economic Research, Inc.
    4. H. Henry Cao & Richard K. Lyons & Martin D.D. Evans, 2003. "Inventory Information," NBER Working Papers 9893, National Bureau of Economic Research, Inc.
    5. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    6. Martin Evans, 2000. "FX trading and Exchange Rate Dynamics," Working Papers gueconwpa~00-00-04, Georgetown University, Department of Economics.
    7. Michael J. Fleming, 2001. "Measuring treasury market liquidity," Staff Reports 133, Federal Reserve Bank of New York.
    8. Evans, Martin D. & Lyons, Richard K., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance, Working Paper Series qt0dh1c16w, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
    9. Benjamin H. Cohen & Hyun Song Shin, 2003. "Positive feedback trading under stress: Evidence from the US Treasury securities market," BIS Working Papers 122, Bank for International Settlements.
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    13. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    15. Balduzzi, Pierluigi & Elton, Edwin J. & Green, T. Clifton, 2001. "Economic News and Bond Prices: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 523-543, December.
    16. Ananth Madhavan & Matthew Richardson & Mark Roomans, . "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Rodney L. White Center for Financial Research Working Papers 20-94, Wharton School Rodney L. White Center for Financial Research.
    17. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Research Paper 9706, Federal Reserve Bank of New York.
    18. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October.
    19. Sandas, Patrik, 2001. "Adverse Selection and Competitive Market Making: Empirical Evidence from a Limit Order Market," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 705-34.
    20. Massa, Massimo & Simonov, Andrei, 2003. "Reputation and interdealer trading: a microstructure analysis of the Treasury Bond market," Journal of Financial Markets, Elsevier, vol. 6(2), pages 99-141, April.
    21. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    22. Mark J. Flannery & Aris A. Protopapadakis, 2002. "Macroeconomic Factors Do Influence Aggregate Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 751-782.
    23. Admati, Anat R & Pfleiderer, Paul, 1991. "Sunshine Trading and Financial Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 443-81.
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