Informed and Strategic Order Flow in the Bond Market

57 Pages Posted: 1 Mar 2005

See all articles by Clara Vega

Clara Vega

Board of Governors of the Federal Reserve System

Paolo Pasquariello

University of Michigan, Stephen M. Ross School of Business

Date Written: February 2005

Abstract

We analyze the role private and public information play in the U.S. Treasury bond price discovery process. 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. We test its equilibrium implications by studying the response of 2-year, 5-year, and 10-year U.S. bond yields to order flow and real-time U.S. macroeconomic news. Consistent with the stylized model, we find that unanticipated order flow explains a bigger portion of bond yield changes when the dispersion of beliefs across informed traders is high and public announcements are noisy.

Keywords: Macroeconomic news announcements, strategic trading, market microstructure, order flow, real-time data, expectations, dispersion of beliefs

JEL Classification: E44, G14

Suggested Citation

Vega, Clara and Pasquariello, Paolo, Informed and Strategic Order Flow in the Bond Market (February 2005). AFA 2007 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=676613 or http://dx.doi.org/10.2139/ssrn.676613

Clara Vega

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/research/staff/vegaclarax.htm

Paolo Pasquariello (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

709 Tappan Street
Room R4434
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United States
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