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

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  • Fricke, Christoph
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    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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    File URL: http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-493.pdf
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    Bibliographic Info

    Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-493.

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    Length: 37 pages
    Date of creation: Feb 2012
    Date of revision:
    Handle: RePEc:han:dpaper:dp-493

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