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On the Effects of Private Information on Volatility

  • Anne Opschoor

    ()

    (Erasmus University Rotterdam and the Tinbergen Institute)

  • Michel van der Wel

    ()

    (Erasmus University Rotterdam, Tinbergen Institute, ERIM and CREATES)

  • Dick van Dijk

    ()

    (Erasmus University Rotterdam, Tinbergen Institute and ERIM.)

  • Nick Taylor

    ()

    (Cardiff Business School)

We study the impact of private information on volatility. We develop a comprehensive framework to investigate this link while controlling for the effects of both public information (such as macroeconomic news releases) and private information on prices and the effect of public information on volatility. Using high-frequency 30-year U.S. Treasury bond futures data, we find that private information, measured by order flow, is statistically and economically significant for explaining volatility. Private information is more important than public information, with the effect of an order flow shock on volatility being 18% larger than the effect of the most influential macroeconomic announcement.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2012-08.

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Length: 42
Date of creation: 02 2012
Date of revision:
Handle: RePEc:aah:create:2012-08
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Manaster, Steven & Mann, Steven C, 1996. "Life in the Pits: Competitive Market Making and Inventory Control," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 953-75.
  2. Andersen, Torben G, 1996. " Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility," Journal of Finance, American Finance Association, vol. 51(1), pages 169-204, March.
  3. Hasbrouck, Joel, 2004. "Liquidity in the Futures Pits: Inferring Market Dynamics from Incomplete Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 305-326, June.
  4. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
  5. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2007. "Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets," CREATES Research Papers 2007-20, School of Economics and Management, University of Aarhus.
  6. Alessandro Beber & Michael W. Brandt, 2010. "When It Cannot Get Better or Worse: The Asymmetric Impact of Good and Bad News on�Bond�Returns in Expansions and Recessions," Review of Finance, European Finance Association, vol. 14(1), pages 119-155.
  7. de Goeij, Peter & Marquering, Wessel, 2006. "Macroeconomic announcements and asymmetric volatility in bond returns," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2659-2680, October.
  8. Balduzzi, Pierluigi & Elton, Edwin J. & Green, T. Clifton, 2001. "Economic News and Bond Prices: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 523-543, December.
  9. He, Yan & Lin, Hai & Wang, Junbo & Wu, Chunchi, 2009. "Price discovery in the round-the-clock U.S. Treasury market," Journal of Financial Intermediation, Elsevier, vol. 18(3), pages 464-490, July.
  10. Tarun Chordia, 2005. "An Empirical Analysis of Stock and Bond Market Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 85-129.
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