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
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: Suggested Citation