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Price Formation and Liquidity Provision in Short-Term Fixed Income Markets

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Author Info
Chris D'Souza
Ingrid Lo
Stephen Sapp

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Abstract

Differences in market structures may affect the manner in which fundamental information is incorporated into prices. High levels of quote and trade transparency plus substantial quoting obligations in European government securities markets ensure that prices are informationally efficient. The relationship between price changes, order flow, relative depth and spreads across European and Canadian short-term government bond markets is examined via a reduced-form vector autoregression model. In European markets, dealers are able to quickly absorb private information elsewhere in the market. Consequently, spreads and the relative depth on the bid and offer sides of the market are found to be only slightly informative. Similarly, order flow, which reflects inventory management practices in addition to private information, explains a smaller proportion of the variation in asset returns in European markets than in Canadian interdealer brokered markets where no quoting obligations exist.

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File URL: http://www.bankofcanada.ca/en/res/wp/2007/wp07-27.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 07-27.

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Length: 36 pages
Date of creation: 2007
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Handle: RePEc:bca:bocawp:07-27

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Related research
Keywords: Market structure and pricing; Financial markets; Interest rates;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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    Other versions:
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