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A Microstructure Model for Spillover Effects in Price Discovery: A Study for the European Bond Market


  • Perlin, Marcelo
  • Dufour, Alfonso
  • Brooks, Chris


This paper is set to investigate the existence of spillover effects for the trading process of correlated financial instruments. While the main literature in price impact models has focused mainly on multivariate processes for a unique asset, we argue that transitory spillover effects in such class of models should exist as a simple biproduct of explicit relationships among prices of different (but correlated) financial instruments. Firstly we assess the theoretical implications of a transitory spillover effect in an extended microstructure model and then we investigate our different hypothesis in the European bond market with a formal econometric model. The results showed that the estimated parameters of the econometric models do conform to what we expect in the theoretical derivations, where the trades of one instrument would be correlated to the trades in others. But, even though the results are positive, they could also be explained by traders splitting orders across different instruments or joint periods of intensive trading. Further analysis also showed that the trading intensity in other instruments does affect the trading process of the particular bonds. We found that a buy (sell) order is less likely to be followed by a buy (sell) order if the market is trading intensively. We explain such effect as an inventory problem, where volatility of prices forces market makers to improve trades in the opposite direction from the current order flow. The main conclusion of this study is that we find inconclusive results towards the particular microstructure model set in the theoretical part of the paper, but positive results for a general spillover effect in the trading process of European fixed income instruments.

Suggested Citation

  • Perlin, Marcelo & Dufour, Alfonso & Brooks, Chris, 2010. "A Microstructure Model for Spillover Effects in Price Discovery: A Study for the European Bond Market," MPRA Paper 23380, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:23380

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    References listed on IDEAS

    1. Alfonso Dufour & Robert F. Engle, 2000. "Time and the Price Impact of a Trade," Journal of Finance, American Finance Association, vol. 55(6), pages 2467-2498, December.
    2. Alfonso Dufour & Frank Skinner, 2004. "MTS Time Series: Market and Data Description for the European Bond and Repo Database," ICMA Centre Discussion Papers in Finance icma-dp2004-06, Henley Business School, Reading University.
    3. de Jong,Frank & Rindi,Barbara, 2009. "The Microstructure of Financial Markets," Cambridge Books, Cambridge University Press, number 9780521867849, March.
    4. Hasbrouck, Joel, 2007. "Empirical Market Microstructure: The Institutions, Economics, and Econometrics of Securities Trading," OUP Catalogue, Oxford University Press, number 9780195301649.
    5. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
    6. 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.
    7. A. E. Fernández Jilberto, 1991. "Introduction," International Journal of Political Economy, Taylor & Francis Journals, vol. 21(1), pages 3-9, March.
    8. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
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    More about this item


    market microstructure; spillover effect; commonalities; liquidity; price impact of a trade.;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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