Does the “Bund” dominate price discovery in Euro bond futures? Examining information shares

Abstract

This paper examines the relative information shares of the Bund, i.e. the ten-year Euro bond future contract on German sovereign debt, versus two futures with shorter maturity. We find that the Bund is most important but does not dominate price discovery. The other contracts also have relevant -and at many days even higher -information shares. In examining determinants of information shares, we add order flow measures to market state variables and macroeconomic news. More order flow in a contract consistently increases this contract's information share.JEL-Classification: G 14 (information efficiency), G 13 (futures pricing), C 32 (time-series) Keywords:Bond futures, information shares, price discovery, order flow, macroeconomic news May 19, 2010 We thank participants at the Christoph Fricke, Lukas Menkhoff; Leibniz Universität Hannover, Department of Economics, Königsworther Platz 1, D-30167 Hannover, Germany; fricke@gif.uni-hannover. de, menkhoff@gif.uni-hannover.de; tel.: +49-511-762-4552, fax: +49-511-762-4796. 2 Does the "Bund" dominate price discovery in Euro bond futures? Examining information shares 1 IntroductionThe so-called "Bund" future contract is often regarded as the single most important asset in the Euro bond markets. The Bund is a standardized contract on German sovereign bonds with ten-year maturity. Due to its benchmark status the trading of this contract is expected to reflect the flow of news into this market more accurately than other assets. According to this view, the Bund would dominate price discovery in the Euro bond markets, i.e. the formation of interest rates. However, price discovery can occur over the whole yield curve and, for example, some news may be more important at shorter interest rates than ten years.Therefore, we examine the relative weight of the Bund future in price discovery versus two other liquid Euro bond future contracts. We find that the Bund is important indeed, but that itis not dominating at all.The Bund future derives its benchmark status for European bond markets mainly from three facts (see Menkveld et al., 2004). First, Germany is the largest economy in the Euro area and its federal debt has the lowest risk spread. Second, future markets seem to be often more important than spot markets in price discovery, in particular if they are more liquid as it is the case here (see Covrig et al., 2004, for equities, Mizrach and Neely, 2008, for bonds). Third, among future contracts on German sovereign debt the Bund has about twice the trading volume than contracts on shorter maturities. Overall, there are good reasons to assume a leading role for the Bund in the process of discovering the interest rate level. There is indeed empirical evidence that German debt has a dominating role in the Euro area and we know that the Bund future dominates the ten-year bond (Upper and Werner, 2007, Schlusche, 2009 Our research addresses exactly this issue: which contract (which market) is relatively most important in incorporating permanent price changes first, i.e. ...

Price discovery in Indian stock index futures market: new evidence based on intraday data

“…Now the question arises why price discovery contribution is changing over time? There are various studies those have analysed the time-variation in price discovery and its determinants (Fricke and Menkhoff, 2011;Frijns et al, 2015aFrijns et al, , 2015bMizrach and Neely, 2008). In Indian context, there is no study, so far, which has analysed the time-variation of price discovery measures.…”

Information share and its predictability in the Indian stock market

“…Andersen, Bollerslev, Diebold, and Vega () report strong but short‐lived news effects on the 5‐year contract in an international context. In examining the determinants of information shares, Fricke and Menkhoff () also examine the effect of macroeconomic news announcements on the Euro bond market. Frijns et al () employ macroeconomic news announcements as a proxy for new information arrivals and examine their impact on price discovery in Canadian–US cross‐listed firms.…”

“…Mizrach and Neely () are the first to demonstrate that market state‐related variables, such as spread, traded contracts, and volatility can explain price discovery shifts between the US treasury spot and the futures market. Following Mizrach and Neely (), other researchers also conduct similar studies for different financial markets (Chen & Gau, ; Chen, Chung, & Lien, ; Fricke & Menkhoff, ; Frijns, Gilbert, & Tourani‐Rad, ; Frijns, Indriawan, & Tourani‐Rad, ). Besides examining the impact of the state‐related variables, some of these studies also investigate the effect of macroeconomic news on price discovery.…”

Price Discovery in the Chinese Gold Market

“…The second commonly used method is utilizes only recently issued or on-the-run contracts instead of expiring contracts. Fricke et al (2011) present the method that uses on-the-run contract with the highest trading volume in combining prices of multiple contracts into a single price series. Both methods examine the trading activity or liquidity when combining prices of different contracts.…”