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Quoted spreads and trade imbalance dynamics in the European Treasury bond market

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Author Info

  • Caporale, Guglielmo Maria
  • Girardi, Alessandro
  • Paesani, Paolo

Abstract

Using high-frequency transaction data for the three largest European markets (France, Germany and Italy), this paper documents the existence of an asymmetric relationship between market liquidity and trading imbalances: when quoted spreads rise (fall) and liquidity falls (increases) buy (sell) orders tend to prevail. Risk-averse market-makers, with inventory-depletion risk being their main concern, tend to quote wider (narrower) spreads when they think bond appreciation is more (less) likely to occur. It is also found that the probability of being in a specific regime is related to observable bond market characteristics, stock market volatility, macroeconomic releases and liquidity management operations of the monetary authorities.

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Bibliographic Info

Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 52 (2012)
Issue (Month): 2 ()
Pages: 173-182

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Handle: RePEc:eee:quaeco:v:52:y:2012:i:2:p:173-182

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Web page: http://www.elsevier.com/locate/inca/620167

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Keywords: Liquidity; Trading activity; Treasury bond market; Europe; Commonality;

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References

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Cited by:
  1. Caporale, Guglielmo Maria & Girardi, Alessandro, 2013. "Price discovery and trade fragmentation in a multi-market environment: Evidence from the MTS system," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 227-240.

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