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BTP futures and cash relationships: a high frequency data analysis

Author

Listed:
  • Onofrio Panzarino

    () (Banca d'Italia)

  • Francesco Potente

    () (Banca d'Italia)

  • Alfonso Puorro

    () (Banca d'Italia)

Abstract

The paper analyses the interactions between the ‘cash’ market (MTS Cash) and the futures market (Eurex) of Italian government bonds in terms of liquidity, price correlation and volatility. Based on daily data, the growth of the Eurex market seems to support the tightening of the bid-ask spread of MTS Cash, all things being equal, thus confirming a healthy and efficient link between cash and futures markets. Against this backdrop, a high frequency analysis highlights some episodes of partial divergence between price developments of futures and cash markets, which might be related to differences in the microstructures of the two markets. The futures market is order driven while the cash market is quote driven; furthermore different types of participants are active in each market. At higher frequencies, episodes of unidirectional propagation of volatility shocks from BTP futures to the MTS Cash market materialize, with potential spillovers on cash market liquidity conditions. In this regard, it is also important to consider the role played by High Frequency Traders, whose activity in futures markets may well contribute to explaining the peculiarities in price dynamics highlighted by high frequency data.

Suggested Citation

  • Onofrio Panzarino & Francesco Potente & Alfonso Puorro, 2016. "BTP futures and cash relationships: a high frequency data analysis," Temi di discussione (Economic working papers) 1083, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1083_16
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2016/2016-1083/en_tema_1083.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Market liquidity; HFT; volatility spillover; government bonds;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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