BTP Futures and Cash Relationships: A High Frequency Data Analysis

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.

The Evolution of the Lead-lag Markets in the Price Discovery Process of the Sovereign Credit Risk: the Case of Italy

“…Figure 1 reports the CDS and GBS (or commonly called "Spread") series movement over the entire selected period. 6 Bund yield has been selected as risk-free rate benchmark because this instrument has a similar liquidity level of BTP (Panzarino et al, 2016), it is a AAA rating instrument and it tends to outperform during periods of financial distress due to fly to quality phenomenon (Paret et al, 2019). 7 The selected time horizon allows us not to include further exogenous events like US-China Trade War (2018-19) and Covid-19 Pandemic (2020) in order to emphasize the role of the European Central Bank (ECB) in affecting market interdependencies over time.…”

Intermediation in Us and EU Bond and Swap Markets: Stylised Facts, Trends and Impact of the Coronavirus (Covid-19) Crisis in March 2020

“…Panzarino et al (2016) show that the growth of Eurex BTP futures has reduced the bid-ask spread in the MTS cash segment. For recent evidence, see also DiGangi et al (2022).73 See for example Bank of England (2020), ECB (2020), Federal Reserve System (2020), IMF (2020),, FSB (2020c),Huang and Takáts (2020),Schrimpf et al (2020) andEren and Wooldridge (2021).…”