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BTP futures and cash relationships: a high frequency data analysis

Onofrio Panzarino (), Francesco Potente () and Alfonso Puorro ()
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Onofrio Panzarino: Banca d'Italia
Francesco Potente: Banca d'Italia
Alfonso Puorro: Banca d'Italia

No 1083, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The paper analyses the interactions between the ‘cash’ market (MTS Cash) and the futures market (Eurex) of Italian government bonds in terms of liquidity, price correlation and volatility. Based on daily data, the growth of the Eurex market seems to support the tightening of the bid-ask spread of MTS Cash, all things being equal, thus confirming a healthy and efficient link between cash and futures markets. Against this backdrop, a high frequency analysis highlights some episodes of partial divergence between price developments of futures and cash markets, which might be related to differences in the microstructures of the two markets. The futures market is order driven while the cash market is quote driven; furthermore different types of participants are active in each market. At higher frequencies, episodes of unidirectional propagation of volatility shocks from BTP futures to the MTS Cash market materialize, with potential spillovers on cash market liquidity conditions. In this regard, it is also important to consider the role played by High Frequency Traders, whose activity in futures markets may well contribute to explaining the peculiarities in price dynamics highlighted by high frequency data.

Keywords: Market liquidity; HFT; volatility spillover; government bonds (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst
Date: 2016-09
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