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Positive feedback trading under stress: Evidence from the US Treasury securities market

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  • Benjamin H. Cohen

    (International Monetary Fund (IMF))

  • Hyun Song Shin

    (Princeton University - Department of Economics)

Abstract

A 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 Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 122.

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Length: 50 pages
Date of creation: Jan 2003
Date of revision:
Handle: RePEc:bis:biswps:122

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Keywords: Treasury bond market; positive feedback; market microstructure;

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  1. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
  2. Piazzesi, Monika, 2001. "An Econometric Model of the Yield Curve With Macroeconomic Jump Effects," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt5946p7hn, Anderson Graduate School of Management, UCLA.
  3. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 576-605, June.
  4. Michael J. Fleming, 2001. "Measuring treasury market liquidity," Staff Reports, Federal Reserve Bank of New York 133, Federal Reserve Bank of New York.
  5. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
  6. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, American Finance Association, vol. 54(5), pages 1901-1915, October.
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