Informed Trading in Government Bond Markets

46 Pages Posted: 7 Nov 2019 Last revised: 11 May 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

Multiple version iconThere are 2 versions of this paper

Date Written: November 20, 2019

Abstract

Using comprehensive administrative data from the UK, we examine trading by different investor groups in government bond markets. Our sample covers virtually all secondary market trading in gilts and contains detailed information of each transaction, including the identities of both counterparties. We find that hedge funds’ daily trading positively forecasts gilt returns in the following one to five days, which is then fully reversed in the following month. A part of this short-term return predictability is due to hedge funds’ front-running other investors’ future demand. Mutual fund trading also positively predicts gilt returns, but over a longer horizon of one to two months. This return pattern does not revert in the following year and is partly due to mutual funds’ ability to forecast changes in short-term interest rates.

Keywords: government bonds, informed trading, return predictability, 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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