IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Quoted Spreads and Trade Imbalance Dynamics in the European Treasury Bond Market

  • Guglielmo Maria Caporale
  • Alessandro Girardi
  • Paolo Paesani

Using high-frequency transaction data for the three largest European markets (France, Germany and Italy), this paper documents the existence of an asymmetric relationship between market liquidity and trading imbalances: when quoted spreads rise (fall) and liquidity falls (increases) buy (sell) orders tend to prevail. Risk-averse market-makers, with inventory-depletion risk being their main concern, tend to quote wider (narrower) spreads when they think bond appreciation is more (less) likely to occur. It is also found that the probability of being in a specific regime is related to observable bond market characteristics, stock market volatility, macroeconomic releases and liquidity management operations of the monetary authorities.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-12/cesifo1_wp3281.pdf
Download Restriction: no

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3281.

as
in new window

Length:
Date of creation: 2010
Date of revision:
Handle: RePEc:ces:ceswps:_3281
Contact details of provider: Postal:
Poschingerstrasse 5, 81679 Munich

Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Christian Upper & Thomas Werner, 2002. "How resilient are financial markets to stress? Bund futures and bonds during the 1998 turbulence," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 110-123 Bank for International Settlements.
  2. Johnson, Timothy C., 2008. "Volume, liquidity, and liquidity risk," Journal of Financial Economics, Elsevier, vol. 87(2), pages 388-417, February.
  3. Marco Pagano, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 255-274.
  4. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, vol. 59(3), pages 383-411, March.
  5. Vacca, V. & Scalia, A., 1999. "Does Market Transparency Matter? A Case Study," Papers 359, Banca Italia - Servizio di Studi.
  6. Schwert, G William, 1989. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(2), pages 147-59, April.
  7. Tarun Chordia, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, 04.
  8. Stefan Boes & Rainer Winkelmann, 2006. "The Effect of Income on Positive and Negative Subjective Well-Being," SOI - Working Papers 0605, Socioeconomic Institute - University of Zurich.
  9. Ioanid Rosu, 2009. "A Dynamic Model of the Limit Order Book," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4601-4641, November.
  10. Pasquariello, Paolo & Vega, Clara, 2009. "The on-the-run liquidity phenomenon," Journal of Financial Economics, Elsevier, vol. 92(1), pages 1-24, April.
  11. Menkveld, Albert J. & Cheung, Yiu Chung & de Jong, Frank, 2004. "Euro area sovereign yield dynamics: the role of order imbalance," Working Paper Series 0385, European Central Bank.
  12. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports 164, Federal Reserve Bank of New York.
  13. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Order Imbalance, Liquidity, and Market Returns," University of California at Los Angeles, Anderson Graduate School of Management qt7gh9t9w3, Anderson Graduate School of Management, UCLA.
  14. Dunne, Peter & Hau, Harald & Moore, Michael, 2008. "A Tale of Two Platforms: Dealer Intermediation in the European Sovereign Bond Market," CEPR Discussion Papers 6969, C.E.P.R. Discussion Papers.
  15. Korajczyk, Robert A. & Sadka, Ronnie, 2008. "Pricing the commonality across alternative measures of liquidity," Journal of Financial Economics, Elsevier, vol. 87(1), pages 45-72, January.
  16. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2006. "Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market," NBER Working Papers 12376, National Bureau of Economic Research, Inc.
  17. Guglielmo Maria Caporale & Alessandro Girardi, 2010. "Price Formation on the EuroMTS Platform," CESifo Working Paper Series 2938, CESifo Group Munich.
  18. Andrea L. Eisfeldt, 2004. "Endogenous Liquidity in Asset Markets," Journal of Finance, American Finance Association, vol. 59(1), pages 1-30, 02.
  19. 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, vol. 54(5), pages 1901-1915, October.
  20. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," Post-Print halshs-00005043, HAL.
  21. David Goldreich & Bernd Hanke & Purnendu Nath, 2005. "The Price of Future Liquidity: Time-Varying Liquidity in the U.S. Treasury Market," Review of Finance, Springer, vol. 9(1), pages 1-32, 03.
  22. Chris D'Souza & Ingrid Lo & Stephen Sapp, 2007. "Price Formation and Liquidity Provision in Short-Term Fixed Income Markets," Staff Working Papers 07-27, Bank of Canada.
  23. Peter G. Dunne & Michael J. Moore & Richard Portes, 2007. "Benchmark Status in Fixed-Income Asset Markets," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9-10), pages 1615-1634.
  24. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  25. Cheung, Yiu Chung & de Jong, Frank & Rindi, Barbara, 2004. "Trading European Sovereign Bonds: The Microstructure of the MTS Trading Platforms," CEPR Discussion Papers 4285, C.E.P.R. Discussion Papers.
  26. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
  27. Stoll, Hans R, 1978. "The Pricing of Security Dealer Services: An Empirical Study of NASDAQ Stocks," Journal of Finance, American Finance Association, vol. 33(4), pages 1153-72, September.
  28. Coluzzi, Chiara & Ginebri, Sergio, 2008. "Order Dynamics in the Italian Treasury Security Wholesale Secondary Market," Economics & Statistics Discussion Papers esdp08050, University of Molise, Dept. EGSeI.
  29. 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.
  30. Guglielmo Maria Caporale & Alessandro Girardi, 2011. "Price Discovery and Trade Fragmentation in a Multi-Market Environment: Evidence from the MTS System," Discussion Papers of DIW Berlin 1139, DIW Berlin, German Institute for Economic Research.
  31. Giorgio Valente & Mark Taylor & Lucio Sarno & Richard Clarida, 2004. "The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates," Working Papers wp04-13, Warwick Business School, Finance Group.
  32. Jian Yang & Yinggang Zhou & Zijun Wang, 2010. "Conditional Coskewness in Stock and Bond Markets: Time-Series Evidence," Management Science, INFORMS, vol. 56(11), pages 2031-2049, November.
  33. Garcia, Gillian, 1989. "The Lender of Last Resort in the Wake of the Crash," American Economic Review, American Economic Association, vol. 79(2), pages 151-55, May.
  34. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
  35. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
  36. Charles R. Nelson & Jeremy M. Piger & Eric Zivot, 2000. "Markov regime-switching and unit root tests," International Finance Discussion Papers 683, Board of Governors of the Federal Reserve System (U.S.).
  37. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  38. Michael W. Brandt & Kenneth A. Kavajecz, 2004. "Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve," Journal of Finance, American Finance Association, vol. 59(6), pages 2623-2654, December.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3281. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.