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Customer flow, intermediaries, and the discovery of the equilibrium riskfree rate

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  • Menkveld, Albert J.
  • Sarkar, Asani
  • van der Wel, Michel

Abstract

Macro announcements change the equilibrium riskfree rate. We find that treasury prices reflect part of the impact instantaneously, but intermediaries rely on their customer order flow in the 15 minutes after the announcement to discover the full impact. We show that this customer flow informativeness is strongest at times when analyst forecasts of macro variables are highly dispersed. We study 30 year treasury futures to identify the customer flow. We further show that intermediaries appear to benefit from privately recognizing informed customer flow, as, in the cross-section, their own-account trade profitability correlates with access to customer orders, controlling for volatility, competition, and the announcement surprise. These results suggest that intermediaries learn about equilibrium riskfree rates through customer orders. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/47.

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Date of creation: 2008
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Handle: RePEc:zbw:cfswop:200847

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Keywords: Riskfree Rate; Macroeconomic Announcements; Customer Flow; Intermediary; Treasury Futures;

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References

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  1. Sugato Chakravarty, 2002. "An examination of own account trading by dual traders in futures markets," Economics Bulletin, AccessEcon, vol. 28(5), pages A0.
  2. Kurov, Alexander & Lasser, Dennis J., 2004. "Price Dynamics in the Regular and E-Mini Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 39(02), pages 365-384, June.
  3. Fishman, Michael J & Longstaff, Francis A, 1992. " Dual Trading in Futures Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 643-71, June.
  4. Paolo Pasquariello & Clara Vega, 2006. "Informed and strategic order flow in the bond markets," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 874, Board of Governors of the Federal Reserve System (U.S.).
  5. Richard C. Green & Burton Hollifield & Norman Schürhoff, 2005. "Financial Intermediation and the Costs of Trading in an Opaque Market," FAME Research Paper Series, International Center for Financial Asset Management and Engineering rp130, International Center for Financial Asset Management and Engineering.
  6. Chung, Kee H. & Chuwonganant, Chairat & McCormick, D. Timothy, 2004. "Order preferencing and market quality on NASDAQ before and after decimalization," Journal of Financial Economics, Elsevier, Elsevier, vol. 71(3), pages 581-612, March.
  7. Roell, Ailsa, 1990. "Dual-capacity trading and the quality of the market," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 1(2), pages 105-124, June.
  8. Lyons, Richard K., 1997. "A simultaneous trade model of the foreign exchange hot potato," Journal of International Economics, Elsevier, Elsevier, vol. 42(3-4), pages 275-298, May.
  9. Chakravarity, Sugato & Li, Kai, 2002. "An Examination of Own Account Trading by Dual Traders in Future Markets," Purdue University Economics Working Papers 1156, Purdue University, Department of Economics.
  10. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, American Finance Association, vol. 48(4), pages 1161-91, September.
  11. T. Clifton Green, 2004. "Economic News and the Impact of Trading on Bond Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 59(3), pages 1201-1234, 06.
  12. 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.
  13. Manaster, Steven & Mann, Steven C, 1996. "Life in the Pits: Competitive Market Making and Inventory Control," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 9(3), pages 953-75.
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