Reputation and Dealers' Trading. A Microstructure Analysis of the Treasury Bond Market

58 Pages Posted: 16 Dec 1999  

Massimo Massa

INSEAD - Finance

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Gaidar Institute for Economic Policy; Centre for Economic Policy Research (CEPR); SITE

Date Written: May 10, 2001

Abstract

Trading generates not only information about the payoff of the assets traded, but also information about the traders themselves. Over time this information creates reputation. By using a unique dataset on the Treasury bond market we derive a measure of reputation. This is then used to group dealers on the basis of their reputation and to analyze how they react to the reputation of other dealers. We show that the same type of trade, on the same asset, in the same market can generate different volume and volatility patterns depending on the type of dealers originating it. We also identify the "marginal traders" - i.e. the class of dealers that has the highest impact on the market. These results have strong implications in terms of forecastability of future returns, volatility and overall trading volume because they show that most of the explanatory power of trades is due to marginal traders.

Notes: This papers title has changed from "Can Strategic Market Making Explain Asset Pricing? A Microstructure Analysis of the T-Bond Market"

Suggested Citation

Massa, Massimo and Simonov, Andrei, Reputation and Dealers' Trading. A Microstructure Analysis of the Treasury Bond Market (May 10, 2001). EFA 2001 Barcelona Meetings. Available at SSRN: https://ssrn.com/abstract=192089 or http://dx.doi.org/10.2139/ssrn.192089

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management ( email )

645 N. Shaw Lane, 321 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.andreisimonov.com

Gaidar Institute for Economic Policy ( email )

3-5 Gazetny Lane
Moscow, 125009
Russia

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

SITE ( email )

P.O. Box 6501
S-113 83 Stockholm, 11383
Sweden

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