Positive feedback trading under stress: Evidence from the US Treasury securities market
AbstractA vector autoregression is estimated on tick-by-tick data for quote-changes and signed trades of two-year, five-year and 10-year on-the-run US Treasury notes. Confirming the results found by Hasbrouck (1991) and others for the stock market, signed order flow tends to exert a strong effect on prices. More interestingly, however, there is often a strong effect in the opposite direction, particularly at times of volatile trading. Price declines elicit sales and price increases elicit purchases. An examination of tick-by-tick trading on an especially volatile day confirms this finding. At least in the US Treasury market, trades and price movements appear likely to exhibit positive feedback at short horizons, particularly during periods of market stress. This suggests that the standard analytical approach to the microstructure of financial markets, which focuses on the ways in which the information possessed by informed traders becomes incorporated into market prices through order flow, should be complemented by an account of how price changes affect trading decisions.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 122.
Length: 50 pages
Date of creation: Jan 2003
Date of revision:
Treasury bond market; positive feedback; market microstructure;
Other versions of this item:
- Benjamin Cohen & Hyun Song Shin, 2002. "Positive feedback trading under stress: evidence from the US Treasury securities market," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 148-180 Bank for International Settlements.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
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