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Expected and unexpected bond excess returns: Macroeconomic and market microstructure effects

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  • Fricke, Christoph

Abstract

This paper shows that order flow determines future bond excess returns. This effect cannot be captured by macroeconomic or forward rate information. To understand how these variables influence future bond excess returns, we decompose excess returns into expected and unexpected excess returns. Expected returns crucially depend on the available information set which is spanned by order flow, forward rates and macroeconomic variables. Thus, the predictability of bond excess returns stems from the strong linkage of expected excess returns to available economic information and order flow. The analysis of unexpected excess returns reveals contemporaneous order flow and changes of the economic environment as main drivers.

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  • Fricke, Christoph, 2012. "Expected and unexpected bond excess returns: Macroeconomic and market microstructure effects," Hannover Economic Papers (HEP) dp-493, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    • Handle: RePEc:han:dpaper:dp-493
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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