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The cross-market information content of stock and bond order flow

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  • Underwood, Shane
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    Abstract

    In this paper I test the hypothesis that trading activity in the stock and bond markets contains important marketwide pricing information. Using a large sample of actively traded stocks and U.S. Treasury securities, I find that aggregate order imbalances play a strong role in explaining cross-market returns. I interpret this as evidence that aggregate order flow reveals information about the risk preferences, beliefs, and endowments of the investor population that is relevant for pricing securities in both markets. I also find evidence that cross-market hedging is an important source of linkages across the two markets, especially during periods of elevated equity volatility.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 12 (2009)
    Issue (Month): 2 (May)
    Pages: 268-289

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    Handle: RePEc:eee:finmar:v:12:y:2009:i:2:p:268-289

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    Web page: http://www.elsevier.com/locate/finmar

    Related research

    Keywords: Cross-markets Stock-bond relationship Order flow;

    References

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    1. Core versus périphérie : pourquoi les taux souverains sont-ils négativement corrélés ?
      by contact@captaineconomics.fr (Le Captain') in Captain Economics on 2012-11-23 06:00:02
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    Cited by:
    1. Eric Girardin & Dijun Tan & Woon K. Wong, 2010. "Information Content of Order Flow and Cross-market Portfolio Rebalancing: Evidence for the Chinese Stock, Treasury and Corporate Bond Markets," Working Papers 022010, Hong Kong Institute for Monetary Research.
    2. Ferreira Filipe, Sara, 2012. "Equity order flow and exchange rate dynamics," Journal of Empirical Finance, Elsevier, vol. 19(3), pages 359-381.
    3. Fricke, Christoph & Menkhoff, Lukas, 2011. "Does the "Bund" dominate price discovery in Euro bond futures? Examining information shares," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1057-1072, May.
    4. Smales, Lee A., 2013. "Bond futures and order imbalance," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 113-132.
    5. Kalimipalli, Madhu & Nayak, Subhankar & Perez, M. Fabricio, 2013. "Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2969-2990.

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