The tail wags the dog: time-varying information shares in the Bund market

Christian Upper and Thomas Werner

No 224, BIS Working Papers from Bank for International Settlements

Abstract: The paper analyses the information content of trades in Bund futures and German government bonds before and during the 1998 financial market turbulences and tests whether the contributions to price discovery of the two market segments were constant over time. The results suggest that, under the normal market conditions prevailing in the first half of the year, between 19% and 33% of the variation in the efficient price was due to trading in the spot market. In the aftermath of the recapitalisation of LTCM, by contrast, the bond market's share in price discovery dropped to zero, with information becoming incorporated into prices only in the futures market. This decline can be traced to an unusually high proportion of large client trades that were executed against dealer inventory, which suggests that they were primarily motivated by liquidity rather than by information. On the methodological side, the paper computes information shares and factor weights based on the Gonzalo-Granger decomposition in markets with different trading frequencies. In addition, the paper captures variations over time by using a sequence of break point tests.

Keywords: Information shares; bond futures; upstairs markets (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2007-01
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Working Paper: Tail Wags Dog? Time-Varying Information Shares in the Bund Market (2002)
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