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Information Content of Order Flow and Cross-market Portfolio Rebalancing: Evidence for the Chinese Stock, Treasury and Corporate Bond Markets

  • Eric Girardin

    (GREQAM ,Universitˆm de la Mˆmditerranˆme-Aix Marseille II ,Hong Kong Institute for Monetary Research)

  • Dijun Tan

    (GREQAM ,Universitˆm de la Mˆmditerranˆme-Aix Marseille II ,University of Electronic Science and Technology of China)

  • Woon K. Wong

    (University of the West of England)

This paper examines the within-market and cross-market information content of order flow for stocks, corporate bonds and Treasury bonds in China. With daily-aggregated tick-by-tick data over three years on the Shanghai Security Exchange, we find negative cross-asset effects of order flow on returns, both between stocks and bonds and between corporate and Treasury bonds. Our results provide evidence that not only cross-market portfolio rebalancing under general market conditions, but also flight-to-quality, which occurs particularly under extreme market conditions, are responsible for the cross-market effects of order flow. In particular, while Treasury bonds play a dominant role in stock-bond portfolio rebalancing, corporate bonds can replace Treasury bonds as a safe ¡§haven¡¨ during extreme stock market conditions or during a fall in Treasury bond market returns.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 022010.

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Length: 31 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:hkm:wpaper:022010
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