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The tail wags the dog: time-varying information shares in the Bund market

Author

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  • Christian Upper
  • Thomas Werner

Abstract

The paper analyses the information content of trades in Bund futures and German government bonds before and during the 1998 financial market turbulences and tests whether the contributions to price discovery of the two market segments were constant over time. The results suggest that, under the normal market conditions prevailing in the first half of the year, between 19% and 33% of the variation in the efficient price was due to trading in the spot market. In the aftermath of the recapitalisation of LTCM, by contrast, the bond market's share in price discovery dropped to zero, with information becoming incorporated into prices only in the futures market. This decline can be traced to an unusually high proportion of large client trades that were executed against dealer inventory, which suggests that they were primarily motivated by liquidity rather than by information. On the methodological side, the paper computes information shares and factor weights based on the Gonzalo-Granger decomposition in markets with different trading frequencies. In addition, the paper captures variations over time by using a sequence of break point tests.

Suggested Citation

  • Christian Upper & Thomas Werner, 2007. "The tail wags the dog: time-varying information shares in the Bund market," BIS Working Papers 224, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:224
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    References listed on IDEAS

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    1. Blume, Marshall E & Goldstein, Michael A, 1997. " Quotes, Order Flow, and Price Discovery," Journal of Finance, American Finance Association, vol. 52(1), pages 221-244, March.
    2. Scalia, Antonio, 1998. "Information transmission and causality in the Italian Treasury bond market," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 361-384, October.
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    Cited by:

    1. William Mingyan Cheung & James Chicheong Lei & Desmond Tsang, 2016. "Does Property Transaction Matter in the Price Discovery of Real Estate Markets?," International Real Estate Review, Asian Real Estate Society, vol. 19(1), pages 27-49.
    2. Schulz, Alexander & Stapf, Jelena, 2009. "Price discovery on traded inflation expectations: does the financial crisis matter?," Discussion Paper Series 1: Economic Studies 2009,25, Deutsche Bundesbank.
    3. Fricke, Christoph & Menkhoff, Lukas, 2011. "Does the "Bund" dominate price discovery in Euro bond futures? Examining information shares," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1057-1072, May.
    4. Ozturk, Sait R. & van der Wel, Michel & van Dijk, Dick, 2017. "Intraday price discovery in fragmented markets," Journal of Financial Markets, Elsevier, vol. 32(C), pages 28-48.
    5. Mingyan Cheung & Chicheong Lei, 2014. "Does Property Transaction Matter in Price Discovery in Real Estate Markets? Evidence from International Firm Level Data," ERES eres2014_195, European Real Estate Society (ERES).
    6. Demosthenes Tambakis, 2009. "Feedback trading and intermittent market turbulence," Quantitative Finance, Taylor & Francis Journals, vol. 9(4), pages 477-489.

    More about this item

    Keywords

    Information shares; bond futures; upstairs markets;

    JEL classification:

    • 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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