Price impact of informed trades in the U.S. treasury markets
DOI:
https://doi.org/10.18533/jefs.v3i03.159Abstract
According to a review of the literature, there is no study that examines how the price impact of informed trades is related to liquidity levels in the U.S. Treasury markets. Using variance decomposition and regime-switching methodologies, we find that the price impact of informed trades is higher in more liquid markets. In the case of on-the-run and off-the-run spot markets, the price impact of informed trades is higher in 2-year and 5-year T-notes markets. In the case of T-notes futures markets, the price impact of informed trades is higher in 10-year futures market. We find that the price impact of uninformed (informed) individual trades decreases (increases) as the time scale increases. The results indicate that the price impact of informed trades is greater between 8:00 am and 3:00 pm when the market is more liquid, and smaller between 3:00 pm and 5:00 pm when the market is less liquid.References
Admati, A. and Pfleiderer, P., (1988). A Theory of intraday trading patterns: Volume and price variability. Review of Financial Studies 1, 3-40. http://dx.doi.org/10.1093/rfs/1.1.3
Brandt, M. W. and Kavajecz K. A. (2004). Price discovery in the U.S. Treasury market: The impact of order flow and liquidity on the yield curve, Journal of Finance 59, 2623 – 54. http://dx.doi.org/10.1111/j.1540-6261.2004.00711.x
Chordia, T., Roll R. and Subrahmanyam A., (2008). Liquidity and market efficiency. Journal of Financial Economics 87, 249-268. http://dx.doi.org/10.1016/j.jfineco.2007.03.005
Chung, K. H., M. Li and McInish T. H., (2005). Information-based trading, price impact of trades, and trade autocorrelation. Journal of Banking and Finance 29, 1645-1669. http://dx.doi.org/10.1016/j.jbankfin.2004.08.001
Easley, D., S. Hvidkjaer and M. O'Hara, (2002). Is information risk a determinant of asset returns? The Journal of Finance 57, 2185 - 2221. http://dx.doi.org/10.1111/1540-6261.00493
Easley, D., Kiefer N. M. and O'Hara M., (1997). The information content of the trading process. Journal of Empirical Finance 4, 159-186. http://dx.doi.org/10.1016/S0927-5398(97)00005-4
Easley, D. and O'Hara M., (1987). Price, trade size, and information in securities markets. Journal of Financial Economics 19, 69–90. http://dx.doi.org/10.1016/0304-405X(87)90029-8
Ederington, L. and Lee J. (1993). How markets process information: News releases and volatility. Journal of Finance 48, 1161-1191. http://dx.doi.org/10.1111/j.1540-6261.1993.tb04750.x
Ellis, K., Michaely R. and O'Hara M., (2000). The accuracy of trade classification rules: Evidence from Nasdaq. The Journal of Financial and Quantitative Analysis 35, 529-551. http://dx.doi.org/10.2307/2676254
Farmer, J. D. and Zamani N., (2007). Mechanical vs. informational components of price impact. European Physical Journal B. 55, 189-200. http://dx.doi.org/10.1140/epjb/e2006-00384-5
Finucane, T.J., (2000). A direct test of methods for inferring trade direction from intra-day data. Journal of Financial and Quantitative Analysis 35, 553-576. http://dx.doi.org/10.2307/2676255
Fleming, M. J., (1997). The round-the-clock market for U.S. Treasury securities. Federal Reserve Bank of New York Economic Policy Review 3, 9-32.
Fleming, M. J., (2003), Measuring treasury market liquidity, Federal Reserve Bank of New York Economic Policy Review 9, 83-108.
Fleming, M. J. and Remolona E. M., (1999). Price formation and liquidity in the U.S. Treasury market: The response to public information. Journal of Finance 54, 1901-15. http://dx.doi.org/10.1111/0022-1082.00172
Glosten, L. R., (1987). Components of the bid-ask spread and the statistical properties of transaction prices. Journal of Finance 42, 1293–1307. http://dx.doi.org/10.1111/j.1540-6261.1987.tb04367.x
Glosten, L. R. and Harris L. E., (1988). Estimating the components of the bid/ask spread. Journal of Financial Economics 21, 123–42. http://dx.doi.org/10.1016/0304-405X(88)90034-7
Hamilton, J. D., (1994). Time Series Analysis (University Press, Princeton, NJ)
Harvey, C. and Huang R., (1991). Volatility in foreign currency futures market. Review of Financial Studies 4, 543-569. http://dx.doi.org/10.1093/rfs/4.3.543
Hasbrouck, J., (1988). Trades, quotes, inventories and information. Journal of Financial Economics 22, 229-252. http://dx.doi.org/10.1016/0304-405X(88)90070-0
Hasbrouck, J., (1991). Measuring the information content of stock trades. Journal of Finance 46, 179-207. http://dx.doi.org/10.1111/j.1540-6261.1991.tb03749.x
Huang, R. D. and Stoll H. R., (1997). The components of the bid-ask spread: A general approach, Review of Financial Studies 10, 995–1034. http://dx.doi.org/10.1093/rfs/10.4.995
Lee, C.M.C. and Ready M., (1991). Inferring trade direction from intraday data. Journal of Finance 46, 733–746. http://dx.doi.org/10.1111/j.1540-6261.1991.tb02683.x
Leng, H., (1996). Announcement vs non-announcement: A study of intraday transaction price of Deutsche mark and Japanese yen futures. Journal of Futures Market 16, 829-857. http://dx.doi.org/10.1002/(SICI)1096-9934(199610)16:7<829::AID-FUT6>3.0.CO;2-Q
Li, H., J. Wang, Wu C. and He Y., (2009). Are liquidity and information risks priced in the treasury bond market? The Journal of Finance 64, 467-503. http://dx.doi.org/10.1111/j.1540-6261.2008.01439.x
Mizrach, B. and Neely C. J., (2008). Information shares in the U.S. Treasury market. Journal of Banking and Finance 32, 1221-1233. http://dx.doi.org/10.1016/j.jbankfin.2007.10.007
Nyholm, K., (2002). Estimating the probability of informed trading. Journal of Financial Research 25, 485-505. http://dx.doi.org/10.1111/1475-6803.00033
Nyholm, K., (2003). Inferring the private information content of trades: A regime-switching approach. Journal of Applied Econometrics 18, 457-70. http://dx.doi.org/10.1002/jae.707
Peiers, B., (1997). Informed traders, intervention, and price leadership: A deeper view of the microstructure of the foreign exchange market. Journal of Finance 52, 1589-1614. http://dx.doi.org/10.1111/j.1540-6261.1997.tb01122.x
Theissen, E., (2001). A test of the accuracy of the Lee/Ready trade classification algorithm. Journal of International Financial Markets, Institutions and Money 11, 147-165. http://dx.doi.org/10.1016/S1042-4431(00)00048-2.
Downloads
Published
Issue
Section
License
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) after official publication, as it can lead to productive exchanges as well as greater citation of published work (See The Effect of Open Access).
