Euro Area Sovereign Yield Dynamics: The Role of Order Imbalance
Albert J. Menkveld
VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA); Duisenberg School of Finance
Yiu Chung Cheung
affiliation not provided to SSRN
Frank De Jong
Tilburg University - Department of Finance
ECB Working Paper No. 385
EFA 2005 Moscow Meetings Paper
We study sovereign yield dynamics and order flow in the largest euro-area treasury markets. We exploit unique transaction data to explain daily yield changes in the ten-year government bonds of Italy, France, Belgium, and Germany. We use a state space model to decompose these changes into (i) a benchmark yield innovation, (ii) a yield spread common factor innovation, (iii) country-specific innovations, and (iv) (transitory) noise. We relate changes in each of these factors to national order imbalance and find that Italian order imbalance impacts the common factor innovation, French and Belgian order imbalance impact country-specific innovations, and German order imbalance only changes yields temporarily. Order imbalance, however, does not have explanatory power for the most important factor: benchmark yield innovations.
Number of Pages in PDF File: 50
Keywords: government bond, order imbalance, euro, international
JEL Classification: G10, G15, G18working papers series
Date posted: December 10, 2004
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