Price Formation on the EuroMTS Platform

Caporale, Guglielmo Maria; Girardi, Alessandro

doi:10.2139/ssrn.1598217

Cited by 9 publications

(21 citation statements)

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“…Although all co-movements are strongly statistically significant, we find that correlations are higher (in absolute terms) when 12 For the computation of summary statistics and correlations for IS we use the average bounds, whilst for CS we follow Blanco et al (2005) and replace values larger than 1 with unity. 13 The small differences between the present results and those in Caporale and Girardi (2011) can be explained by the different information criterion chosen to estimate the VEC models.…”

Section: Dynamic Vs Traditional Price Discovery Maesures: a Comparisonmentioning

confidence: 61%

“…As in Caporale and Girardi (2011), daily observations cover the period from January 2, 2004 to March 31, 2006. This sample period corresponds to a relatively quiet period in financial markets since it ends a few weeks before the sudden appearance of severe liquidity problems in several financial segments.…”

Section: Exchanges and Datamentioning

confidence: 99%

“…As in Caporale and Girardi (2011), we focus on these two cash markets for euro-denominated government securities.…”

Section: Introductionmentioning

confidence: 99%

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Price Discovery and Trade Fragmentation in a Multi-Market Environment: Evidence from the MTS System

Caporale

Girardi²

2011

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This paper proposes new metrics for the process of price discovery on the main electronic trading platform for euro-denominated government securities. Analysing price data on daily transactions for 107 bonds over a period of twenty-seven months, we find a greater degree of price leadership of the dominant market when our measures (as opposed to the traditional price discovery metrics) are used. We also present unambiguous evidence that a market's contribution to price discovery is crucially affected by the level of trading activity. The implications of these empirical findings are discussed in the light of the debate about the possible restructuring of the regulatory framework for the Treasury bond market in Europe.Keywords: Price discovery, liquidity, MTS system. JEL Classification: G10, C21, C32. We are grateful to Barbara Rindi and Cherl Hyun Kim for helpful and suggestions on an earlier draft of the paper. The paper has also benefited considerably from insightful comments from

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Section: Dynamic Vs Traditional Price Discovery Maesures: a Comparisonmentioning

confidence: 61%

Section: Exchanges and Datamentioning

confidence: 99%

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Price Discovery and Trade Fragmentation in a Multi-Market Environment: Evidence from the MTS System

Caporale

Girardi²

2011

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“…Proposals are firm, immediately executable and aggregated in a limit order book. 2 As in Dunne et al (2007), we analyse the three largest European markets (Italy, [4] France and Germany), which account for over 70 percent of the European secondary bond market. 3 The dataset consists of tick-by-tick transaction data (prices and Table 1 provides the list of bond codes along with information on issue dates, maturity dates and summary statistics on trading activity.…”

Section: -Data and Measurementmentioning

confidence: 99%

“…3 The dataset consists of tick-by-tick transaction data (prices and Table 1 provides the list of bond codes along with information on issue dates, maturity dates and summary statistics on trading activity. 4 [ indicator of liquidity is the quoted bid-ask spreads ( qspr ), defined as the difference between the best bid and best ask divided by mid-quote prices (equally weighted) averaged during half-hour time intervals. The trading imbalances indicator ( oflw ) is constructed as the aggregate volume of buyer-minus seller-initiated orders during half-hour intervals.…”

Section: -Data and Measurementmentioning

confidence: 99%

Quoted Spreads and Trade Imbalance Dynamics in the European Treasury Bond Market

2010

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Using high-frequency transaction data for the three largest European markets (France, Germany and Italy), this paper documents the existence of an asymmetric relationship between market liquidity and trading imbalances: when quoted spreads rise (fall) and liquidity falls (increases) buy (sell) orders tend to prevail. Risk-averse market-makers, with inventory-depletion risk being their main concern, tend to quote wider (narrower) spreads when they think bond appreciation is more (less) likely to occur. It is also found that the probability of being in a specific regime is related to observable bond market characteristics, stock market volatility, macroeconomic releases and liquidity management operations of the monetary authorities.Keywords: Liquidity, trading activity, Treasury bond market, Europe, commonality JEL Classification: G1, G15, C32, C33 -IntroductionOver the past few years a growing body of research has been devoted to analysing the market for government securities in Europe focusing on the dynamic relationship between trading activity and price movements (Cheung et al., 2005) With the aim of contributing to this literature, the present study focuses on the relationship between quoted spreads and trading imbalances and on its financial and macroeconomic determinants. While these issues have been extensively discussed in the case of the US stock market, no comparable analysis has been conducted to date in the case of European markets for government securities.Our analysis is related to the strand of financial literature investigating the interaction between liquidity and trading activity. This interaction affects the process of price discovery (Brandt and Kavajecz, 2004), depends on the degree of financial integration (Hasbrouck and Seppi, 2001;Korajczyk and Sadka, 2008) particular, we document the existence of an asymmetric relationship between quoted spreads and trading imbalances such that when liquidity is high (low) and quoted spreads narrow (wide), sell (buy) orders tend to prevail. For most bonds in the sample, we also find an intermediate state when orders tend to be balanced. Second, after daily averaging intra-day probabilities extracted from the estimated MS-VAR models, we investigate common potential determinants for the switches across states by random effect probit-estimation for longitudinal data. We find that the relationship between liquidity and trading imbalances is affected by financial and macroeconomic factors including: refinancing costs, bond and stock market volatility, changing business and macroeconomic climate and changing monetary policy stance.The rest of the paper is organised as follows. Section 2 presents the data and some descriptive statistics. In Section 3 we investigate the dynamic interaction between quoted spreads and order flow imbalances at the individual bond level. Section 4 explores the role of common factors in explaining co-movements between these two market characteristics at an aggregate level. Section 5 offers some concluding remarks. -Data an...

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Overcrowding Versus Liquidity in the Euro Sovereign Bond Markets

2012

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With the adoption of a common currency, the degree of substitution between financial instruments supplied by EMU Member States to finance their national debts has risen. Providing the market for euro‐denominated government securities with a large volume of similar financial instruments is likely to increase liquidity and lower yields. By contrast, providing an excessive volume of the same instrument might increase the return demanded by investors. This paper aims at empirically assessing the balance between liquidity and overcrowding effects by EMU countries' issuance plans. Our results document a significant relationship between bunching in issues and bond yields. Copyright © 2012 John Wiley & Sons, Ltd.

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Price Formation on the EuroMTS Platform

Cited by 9 publications

References 37 publications

Price Discovery and Trade Fragmentation in a Multi-Market Environment: Evidence from the MTS System

Price Discovery and Trade Fragmentation in a Multi-Market Environment: Evidence from the MTS System

Quoted Spreads and Trade Imbalance Dynamics in the European Treasury Bond Market

Overcrowding Versus Liquidity in the Euro Sovereign Bond Markets

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