Price Discovery in Canadian Government Bond Futures and Spot Markets

Christopher Chung, Bryan Campbell and Scott Hendry

Staff Working Papers from Bank of Canada

Abstract: In this paper we look at the relative information content of cash and futures prices for Canadian Government bonds. We follow the information-share approaches introduced by Hasbrouck (1995) and Harris et al (1995), applying the techniques in Gonzalo-Granger (1995), to evaluate the relative contributions of trading in the cash and futures markets to the price discovery process. Both approaches estimate a vector error correction model that permits the separation of long-run price movements from short-run market microstructure effects. As well, we follow Yan and Zivot (2004) who introduce size measures of a market's adjustment to a new equilibrium during the price discovery process. We find that, on an average day, just over 70% of price discovery occurs on the futures market where bid-ask spreads are lower and trading activity is higher. The size of the responses to shocks and the time taken to adjust to a new equilibrium are found to be significantly larger for the cash market.

Keywords: Financial markets; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2007
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:07-4

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