Informed and Strategic Order Flow in the Bond Markets

By Paolo Pasquariello, Clara Vega. 2006

236 citations recorded by the source corpus.

We study the role played by private and public information in the process of price formation in the U.S. Treasury bond market. To guide our analysis, we develop a parsimonious model of speculative trading in the presence of two realistic market frictions—information heterogeneity and imperfect competition among informed traders—and a public signal. We test its equilibrium implications by analyzing the response of two-year, five-year, and ten-year U.S. bond yields to order flow and real-time U.S. macroeconomic news. We find strong evidence of informational effects in the U.S. Treasury bond market: unanticipated order flow has a significant and permanent impact on daily bond yield changes during both announcement and nonannouncement days. Our analysis further shows that, consistent with our stylized model, the contemporaneous correlation between order flow and yield changes is higher when the dispersion of beliefs among market participants is high and public announcements are noisy. , Oxford University Press.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/fa3885b671704e967dfc34ed04b2eb1a8f3029cd

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Citations in the corpus

Stochastic Risk Premiums, Stochastic Skewness in Currency Options, and Stochastic Discount Factors in International Economies (2008, unknown): “The origin of these jumps can be tied to the way in which markets respond to information (Andersen, Bollerslev, Diebold, and Vega, 2003; Beber and Brandt, 2006a; Piazzesi, 2005; Pasquariello and Vega, 2007).”
Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets (2006, background): “Several recent studies have highlighted the role of order flow in the price formation process, including Brandt and Kavajecz (2004), Evans and Lyons (2003, 2005) and Pasquariello and Vega (2004) .”
On the Volatility and Comovement of U.S. Financial Markets Around Macroeconomic News Announcements (2009, background): “, Shiller (1989), King and Wadhwani (1990), Pindyck and Rotemberg (1990), (1993), Karolyi and Stulz (1996), and Connolly and Wang (2003)), from more intense portfolio rebalancing activity across stocks and bonds (e.”
Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market: Rise of the Machines (2009, unknown): “[37] Pasquariello, P.”
Does Asymmetric Information Drive Capital Structure Decisions (2009, background): “15 See http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data library.html.”
Does Public Financial News Resolve Asymmetric Information (2010, background): “This article also contributes to a growing literature on the impact of public news releases, which includes Stickel and Verrecchia (1994), Pritamani and Singal (2001), Chan (2003), Chae (2005), Vega (2006), Chava and Tookes (2007), Gutierrez and Kelley (2008), and Tetlock, Saar-Tsechansky, and Macsk”
Stock Price Reaction to Public and Private Information (2006, unknown): “The effect FLOW, TURN and DISP have on the PEAD is consistent with Verardo’s (2004) hypothesis that stocks associated with dispersion of beliefs experience larger drift.”
The on-the-run liquidity phenomenon (2009, methodology): “Pasquariello and Vega (2007) show that, in a Kyle (1985) setting similar to ours, introducing a public signal improves market liquidity.”
Can Information Be Locked-Up? Informed Trading Ahead of Macro-News Announcements (2016, unknown): “…and Roley (1985), French and Roll (1986), Ederington and Lee (1993), Veronesi (1999), Flannery and Protopapadakis (2001), Vega (2006), Tetlock (2010)), and foreign exchange markets (e.g., Urich and Wachtel (1984), Fleming and Remolona (1999), Balduzzi et al. (2001), Pasquariello and Vega (2007)).”