Financial networks and trading in bond markets

G. Geoffrey Booth, Umit Gurun and Harold Zhang

Journal of Financial Markets, 2014, vol. 18, issue C, 126-157

Abstract: We examine how financial networks influence asset prices and trading performance. Consistent with theoretical studies on the role of communication networks in information dissemination, we posit that global financial institutions, having more extensive and strategic financial networks, can more efficiently acquire and process information pertaining to asset trading due to their better access to order flows and, thus, have better trading performance than local financial institutions with less extensive and strategic financial networks. Using transaction level Turkish government bond trading data, we find that global financial institutions exhibit a stronger tendency to trade in more liquid bonds and consistently trade at more favorable prices than local financial institutions, suggesting that global financial institutions have an informational advantage. They also enjoy better trading performance on informed trades but this informational advantage tends to decline over time, indicating possible learning by local financial institutions as a result of trading with their global financial counterparts.

Keywords: Financial networks; Informational advantage; Bond market trading (search for similar items in EconPapers)
JEL-codes: F21 G15 G21 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:18:y:2014:i:c:p:126-157

DOI: 10.1016/j.finmar.2013.08.001

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