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Euro-Area Sovereign Yield Dynamics: the role of order imbalance

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Author Info
Menkveld, Albert J. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)
Cheung, Yiu C.
Jong, Frank de
Abstract

We study sovereign yield dynamics and order flow in the largest euro-area treasury markets. We exploit unique transaction data to explain daily yield changes in the tenðyear government bands of Italy, France, Belgium, and Germany. We use a state space model to decompose these changes into (i) a benchmark yield innovation, (ii) a yield spread common factor innovation, (iii) country-specific innovations, and (iv) (transitory) microstructure effects. We relate changes in each of these factors to national order imbalance and find that Italian order imbalance impacts the common factor innovation, French and Belgian order imbalance impact country-specific innovations, and German order imbalance only changes yields temporarily. Order imbalance, however, does not have explanatory power for the most important factor: benchmark yield innovations.

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Paper provided by Free University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0006.

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Date of creation: 2006
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Handle: RePEc:dgr:vuarem:2006-6

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Keywords: Government bond Order imbalance Euro

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Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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  1. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2006. "Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market," NBER Working Papers 12376, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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