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The tail wags the dog: time-varying information shares in the Bund market

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  • Christian Upper
  • Thomas Werner

Abstract

The paper analyses the information content of trades in Bund futures and German government bonds before and during the 1998 financial market turbulences and tests whether the contributions to price discovery of the two market segments were constant over time. The results suggest that, under the normal market conditions prevailing in the first half of the year, between 19% and 33% of the variation in the efficient price was due to trading in the spot market. In the aftermath of the recapitalisation of LTCM, by contrast, the bond market's share in price discovery dropped to zero, with information becoming incorporated into prices only in the futures market. This decline can be traced to an unusually high proportion of large client trades that were executed against dealer inventory, which suggests that they were primarily motivated by liquidity rather than by information. On the methodological side, the paper computes information shares and factor weights based on the Gonzalo-Granger decomposition in markets with different trading frequencies. In addition, the paper captures variations over time by using a sequence of break point tests.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 224.

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Length: 43 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:bis:biswps:224

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Related research

Keywords: Information shares; bond futures; upstairs markets;

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References

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  1. Blume, Marshall E & Goldstein, Michael A, 1997. " Quotes, Order Flow, and Price Discovery," Journal of Finance, American Finance Association, vol. 52(1), pages 221-44, March.
  2. Scalia, Antonio, 1998. "Information transmission and causality in the Italian Treasury bond market," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 361-384, October.
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Cited by:
  1. Sait Ozturk & Michel van der Wel, 2014. "Intraday Price Discovery in Fragmented Markets," Tinbergen Institute Discussion Papers 14-027/III, Tinbergen Institute.
  2. Tambakis, D.N., 2008. "Feedback Trading and Intermittent Market Turbulence," Cambridge Working Papers in Economics 0847, Faculty of Economics, University of Cambridge.
  3. Fricke, Christoph & Menkhoff, Lukas, 2011. "Does the "Bund" dominate price discovery in Euro bond futures? Examining information shares," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1057-1072, May.
  4. Schulz, Alexander & Stapf, Jelena, 2009. "Price discovery on traded inflation expectations: does the financial crisis matter?," Discussion Paper Series 1: Economic Studies 2009,25, Deutsche Bundesbank, Research Centre.

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