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Abstract:
We study the role played by private and public information in the process of price formation
in the U.S. Treasury bond market. To guide our analysis, we develop a parsimonious model of
speculative trading in the presence of two realistic market frictions -- information heterogeneity
and imperfect competition among informed traders -- and a public signal. We test its equilibrium
implications by analyzing the response of two-year, five-year, and ten-year U.S. bond yields
to order flow and real-time U.S. macroeconomic news. We find strong evidence of informational
effects in the U.S. Treasury bond market: unanticipated order flow has a significant and permanent
impact on daily bond yield changes during both announcement and non-announcement
days. Our analysis further shows that, consistent with our stylized model, the contemporaneous
correlation between order flow and yield changes is higher when the dispersion of beliefs among
market participants is high and public announcements are noisy.
Full paper (546 KB PDF)
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Keywords
Treasury Bond Markets, Macroeconomic News Announcements, Strategic Trading, Market Microstructure, Order Flow, Real-Time Data, Expectations, Dispersion of Beliefs
PDF files: Adobe Acrobat Reader ZIP files: PKWARE
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