Positive Feedback Trading Under Stress: Evidence from the Us Treasury Securities Market

50 Pages Posted: 13 Dec 2005

See all articles by Benjamin H. Cohen

Benjamin H. Cohen

Bank for International Settlements (BIS)

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: August 2002

Abstract

A vector autoregression is estimated on tick-by-tick data for quote-changes and signed trades of 2-year, 5-year and 10-year on-the-run US Treasury notes. Confirming the results found by Hasbrouck (1991) and others for the stock market, signed order flow tends to exert a strong effect on prices. More interestingly, however, there is often a strong effect in the opposite direction, particularly at times of volatile trading. Price declines elicit sales and price increases elicit purchases. An examination of tick-by-tick trading on an especially volatile day confirms this finding. At least in the US Treasury market, trades and price movements appear likely to exhibit positive feedback at short horizons, particularly during periods of market stress. This suggests that the standard analytical approach to the microstructure of financial markets, which focuses on the ways in which the information possessed by informed traders becomes incorporated into market prices through order flow, should be complemented by an account of how price changes affect trading decisions.

Suggested Citation

Cohen, Benjamin H. and Shin, Hyun Song, Positive Feedback Trading Under Stress: Evidence from the Us Treasury Securities Market (August 2002). AFA 2003 Washington, DC Meetings; BIS Working Paper No. 122. Available at SSRN: https://ssrn.com/abstract=341920 or http://dx.doi.org/10.2139/ssrn.341920

Benjamin H. Cohen (Contact Author)

Bank for International Settlements (BIS) ( email )

Basel
Switzerland

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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