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The Effects of Economic News on Bond Market Liquidity

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  • Chris D'Souza
  • Charles Gaa

Abstract

The authors contrast the impact of two sources of information flow on the volatility of prices, trading activity, and liquidity in the brokered interdealer market for Government of Canada bonds. Liquidity varies with the amount of asymmetric information in the market, and order flow plays a central role in the processing of information. The authors find a two-stage adjustment process in the period before and after a scheduled 8:30 a.m. macroeconomic news announcement that is similar to the adjustment process documented by Fleming and Remolona (1999) for the U.S. Treasury market. They contrast these dynamics with the adjustment that occurs around a Government of Canada bond auction. Results are somewhat inconsistent with the patterns observed around macroeconomic news events, but are explained by theory.

Suggested Citation

  • Chris D'Souza & Charles Gaa, 2004. "The Effects of Economic News on Bond Market Liquidity," Staff Working Papers 04-16, Bank of Canada.
  • Handle: RePEc:bca:bocawp:04-16
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    References listed on IDEAS

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    3. Michael Fleming & Asani Sarkar, 1999. "Liquidity in U.S. Treasury Spot and Futures Markets," CGFS Papers chapters,in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-14 Bank for International Settlements.
    4. Babbel, David F. & Merrill, Craig B. & Meyer, Mark F. & de Villiers, Meiring, 2004. "The Effect of Transaction Size on Off-the-Run Treasury Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(03), pages 595-611, September.
    5. Benjamin Cohen & Hyun Song Shin, 2002. "Positive feedback trading under stress: evidence from the US Treasury securities market," BIS Papers chapters,in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 148-180 Bank for International Settlements.
    6. Hirotaka Inoue, 1999. "The Structure of Government Securities Markets in G10 Countries: Summary of Questionnaire Results," CGFS Papers chapters,in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-22 Bank for International Settlements.
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    12. Toni Gravelle & Richhild Moessner, 2001. "Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency," Staff Working Papers 01-5, Bank of Canada.
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    Cited by:

    1. Natasha Khan, 2007. "Impact of Electronic Trading Platforms on the Brokered Interdealer Market for Government of Canada Benchmark Bonds," Staff Working Papers 07-5, Bank of Canada.
    2. Alan Mehlenbacher, 2007. "Multiagent System Simulations of Treasury Auctions," Department Discussion Papers 0709, Department of Economics, University of Victoria.
    3. Coluzzi, Chiara & Ginebri, Sergio & Turco, Manuel, 2008. "Measuring and Analyzing the Liquidity of the Italian Treasury Security Wholesale Secondary Market," Economics & Statistics Discussion Papers esdp08044, University of Molise, Dept. EGSeI.

    More about this item

    Keywords

    Financial markets; Market structure and pricing; Debt management;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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