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Price Discovery in Canadian Government Bond Futures and Spot Markets

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Author Info
Christopher Chung
Bryan Campbell
Scott Hendry

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Abstract

In this paper we look at the relative information content of cash and futures prices for Canadian Government bonds. We follow the information-share approaches introduced by Hasbrouck (1995) and Harris et al (1995), applying the techniques in Gonzalo-Granger (1995), to evaluate the relative contributions of trading in the cash and futures markets to the price discovery process. Both approaches estimate a vector error correction model that permits the separation of long-run price movements from short-run market microstructure effects. As well, we follow Yan and Zivot (2004) who introduce size measures of a market's adjustment to a new equilibrium during the price discovery process. We find that, on an average day, just over 70% of price discovery occurs on the futures market where bid-ask spreads are lower and trading activity is higher. The size of the responses to shocks and the time taken to adjust to a new equilibrium are found to be significantly larger for the cash market.

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Publisher Info
Paper provided by Bank of Canada in its series Working Papers with number 07-4.

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Length: 40 pages
Date of creation: 2007
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Handle: RePEc:bca:bocawp:07-4

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

Other versions of this item:

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Baillie, Richard T. & Geoffrey Booth, G. & Tse, Yiuman & Zabotina, Tatyana, 2002. "Price discovery and common factor models," Journal of Financial Markets, Elsevier, vol. 5(3), pages 309-321, July. [Downloadable!] (restricted)
  2. Chris D'Souza & Charles Gaa & Jing Yang, 2003. "An Empirical Analysis of Liquidity and Order Flow in the Brokered Interdealer Market for Government of Canada Bonds," Working Papers 03-28, Bank of Canada. [Downloadable!]
  3. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(1), pages 123-52. [Downloadable!] (restricted)
  4. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 27-35, January.
    Other versions:
  5. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
    Other versions:
  6. Grunbichler Andreas & Longstaff Francis A. & Schwartz Eduardo S., 1994. "Electronic Screen Trading and the Transmission of Information: An Empirical Examination," Journal of Financial Intermediation, Elsevier, vol. 3(2), pages 166-187, March. [Downloadable!] (restricted)
  7. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-97, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alessandro Girardi, 2008. "The Informational Content of Trades on the EuroMTS Platform," ISAE Working Papers 97, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
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