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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. Ammer, John & Campbell, John, 1993. "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Scholarly Articles 3382857, Harvard University Department of Economics.
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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. Smales, Lee A., 2013. "Bond futures and order imbalance," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 113-132.
    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. 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.
    5. 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.

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