Informed Trading in Government Bond Markets

49 Pages Posted: 7 Nov 2019 Last revised: 9 Jan 2020

See all articles by Robert Czech

Robert Czech

Bank of England

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Tianyu Wang

School of Economics and Management, Tsinghua University

Date Written: November 20, 2019

Abstract

We show that both hedge funds and mutual funds contribute to the price discovery in the government bond market using comprehensive administrative data from the UK. Our sample covers virtually all secondary market trades in gilts and contains detailed information on each individual transaction, including the identities of both counterparties. Hedge funds’ daily trading positively forecasts gilt returns in the following one to five days, which is fully reversed in the following months. Part of this short-term return pattern is due to hedge funds’ ability to forecast other investors’ future order flows. Mutual funds’ trading also positively forecasts bond returns but at a longer horizon, over the next one to two months, which does not revert in the following year. Additional analyses reveal that mutual funds’ superior performance is likely due to their ability to forecast future movements in short-term yields.

Keywords: government bond returns, return predictability, yield curve, asset managers

Suggested Citation

Czech, Robert and Huang, Shiyang and Lou, Dong and Wang, Tianyu, Informed Trading in Government Bond Markets (November 20, 2019). Available at SSRN: https://ssrn.com/abstract=3476670 or http://dx.doi.org/10.2139/ssrn.3476670

Robert Czech

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/researchers/robert-czech

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tianyu Wang (Contact Author)

School of Economics and Management, Tsinghua University ( email )

Shuangqing Road 30
Haidian District
Beijing, Beijing SW7 2AZ
China

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