Tail Wags Dog? Time-Varying Information Shares in the Bund Market

Deutsche Bundesbank, Economic Research Centre Working Paper No. 24/02

36 Pages Posted: 28 Apr 2003

See all articles by Christian Upper

Christian Upper

Bank for International Settlements (BIS)

Thomas Werner

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2002


The flow of information between markets may vary over time, in particular during periods of stress. We measure the contributions to price discovery of trading in the Bund Future and in German government bonds using the information shares approach by Hasbrouck (1995) as well as factor weights based on the Gonzalo-Granger decomposition. Since there are many more transactions in the future than in the underlying bonds, we estimate the underlying VECM in state-space using the Kalman filter. We then test for structural breaks and estimate the most likely break dates. We find that more information is incorporated into prices in the futures than in the spot market, with the latter contributing 19 to 33% of the variation in the efficient price during tranquil times. In periods of stress, the informational role of the spot market may vanish. For example, during the two weeks after the recapitalization of LTCM (September 24th to October 8th, 1998), the information share of the spot market dropped to virtually zero and futures prices did not respond to movements in bond prices. All adjustment towards equilibrium took place in the spot market.

Keywords: high-frequency data, market microstructure, future markets, information shares, kalman filter

JEL Classification: G12, G14, C32

Suggested Citation

Upper, Christian and Werner, Thomas, Tail Wags Dog? Time-Varying Information Shares in the Bund Market (October 2002). Deutsche Bundesbank, Economic Research Centre Working Paper No. 24/02, Available at SSRN: https://ssrn.com/abstract=379400 or http://dx.doi.org/10.2139/ssrn.379400

Christian Upper (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002

Thomas Werner

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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