Information Content of Order Flow and Cross-Market Portfolio Rebalancing: Evidence for the Chinese Stock, Treasury and Corporate Bond Markets

HKIMR Working Paper No. 02/2010

31 Pages Posted: 22 Jun 2010

See all articles by Eric Girardin

Eric Girardin

University Aix-Marseille 2 - GREQAM

Dijun Tan

University of Electronic Science and Technology of China (UESTC)

Woon K. Wong

IMRU, Cardiff Business School

Date Written: January 31, 2010

Abstract

This paper examines the within-market and cross-market information content of order flow for stocks, corporate bonds and Treasury bonds in China. With daily-aggregated tick-by-tick data over three years on the Shanghai Security Exchange, we find negative cross-asset effects of order flow on returns, both between stocks and bonds and between corporate and Treasury bonds. Our results provide evidence that not only cross-market portfolio rebalancing under general market conditions, but also flight-to-quality, which occurs particularly under extreme market conditions, are responsible for the cross-market effects of order flow. In particular, while Treasury bonds play a dominant role in stock-bond portfolio rebalancing, corporate bonds can replace Treasury bonds as a safe “haven” during extreme stock market conditions or during a fall in Treasury bond market returns.

Keywords: Order Flow, Portfolio Rebalancing, Flight-to-quality, Chinese Financial Markets

JEL Classification: G10, G11, G12, G14

Suggested Citation

Girardin, Eric and Tan, Dijun and Wong, Woon K., Information Content of Order Flow and Cross-Market Portfolio Rebalancing: Evidence for the Chinese Stock, Treasury and Corporate Bond Markets (January 31, 2010). HKIMR Working Paper No. 02/2010. Available at SSRN: https://ssrn.com/abstract=1628020 or http://dx.doi.org/10.2139/ssrn.1628020

Eric Girardin (Contact Author)

University Aix-Marseille 2 - GREQAM ( email )

Centre de la Vieille Charité
Marseille, 13 002
France

Dijun Tan

University of Electronic Science and Technology of China (UESTC) ( email )

No.4, Section 2, North Jianshe Road
Chengdu, Chengdu
China

Woon K. Wong

IMRU, Cardiff Business School ( email )

Cardiff CF10 3EU
United Kingdom

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