Permanent trading impacts and bond yields

Article English OPEN
Dufour, Alfonso ; Nguyen, Minh (2012)

We analyze four years of transaction data for euro-area sovereign bonds traded on the MTS electronic platforms. In order to measure the informational content of trading activity, we estimate the permanent price response to trades. We find not only strong evidence of information asymmetry in sovereign bond markets, but we also show the relevance of information asymmetry in explaining the cross-sectional variations of bond yields across a wide range of bond maturities and countries. Our results confirm that trades of more recently issued bonds and longer maturity bonds have a greater permanent effect on prices. We compare the price impact of trades for bonds across different maturity categories and find that trades of French and German bonds have the highest long-term price impact in the short maturity class whereas trades of German bonds have the highest permanent price impacts in the long maturity class. More importantly, we study the cross-section of bond yields and find that after controlling for conventional factors, investors demand higher yields for bonds with larger permanent trading impact. Interestingly, when investors face increased market uncertainty, they require even higher compensation for information asymmetry.
  • References (43)
    43 references, page 1 of 5

    Admati, A. R., and P. C. Pfleiderer. 1988. A theory of intraday patterns: Volume and price variability. Review of Financial Studies 1, no. 1: 3-40.

    Amihud, Y., and H. Mendelson. 1991. Liquidity, maturity, and the yields on U.S. treasury securities. Journal of Finance 46, no. 4: 1411-1425.

    Balduzzi, P., E. J. Elton, and T. C. Green. 2001. Economic news and bond prices: Evidence from the U.S. treasury market. Journal of Financial and Quantitative Analysis 36, no. 4: 523-543.

    Beber, A., M. W. Brandt, and K. A. Kavajecz. 2009. Flight-to-quality or flight-toliquidity? Evidence from the Euro-area bond market. Review of Financial Studies 22, no. 3: 925-957.

    Bessembinder, H. 2002. Tick size, spreads, and liquidity: An analysis of Nasdaq Securities trading near ten dollars. Journal of Financial Intermediation 9, no.3: 213-239.

    Black, F., M. Jensen, and M. Scholes. eds. 1972. The capital asset pricing model: Some empirical tests. New York: Praeger.

    Blair, B. J., S.-H. Poon, and S. J. Taylor. 2001. Forecasting S&P 100 volatility: The incremental information content of implied volatilities and high-frequency index returns. Journal of Econometrics 105, no. 1: 5-26.

    Blanco, R., S. Brennan, and I. W. Marsh. 2005. An empirical analysis of the dynamic relation between investment-grade bonds and credit default swaps. Journal of Finance 60, no. 5: 2255-2281.

    Brandt, M. W., and K. A. Kavajecz. 2004. Price discovery in the U.S. treasury market: The impact of orderflow and liquidity on the yield curve. Journal of Finance 59, no. 6: 2623-2654.

    Brennan, M. J., and A. Subrahmanayam. 1996. Market microstructure and asset pricing: On the compensation for illiquidity in stock returns. Journal of Financial Economics 41, no. 3: 441-464.

  • Metrics
    views in OpenAIRE
    views in local repository
    downloads in local repository

    The information is available from the following content providers:

    From Number Of Views Number Of Downloads
    Central Archive at the University of Reading - IRUS-UK 0 300
Share - Bookmark