Price and Liquidity Discovery in European Sovereign Bonds and Futures

39 Pages Posted: 13 May 2022 Last revised: 18 Jul 2022

See all articles by Ruggero Jappelli

Ruggero Jappelli

Goethe University, Frankfurt; Leibniz Institute for Financial Research SAFE

Konrad Lucke

Leibniz Institute for Financial Research SAFE; Goethe University Frankfurt, House of Finance (HoF), Graduate School of Economics, Finance and Management (GSEFM), Students

Loriana Pelizzon

Leibniz Institute for Financial Research SAFE

Date Written: June 10, 2022

Abstract

This work uses financial markets connected by arbitrage relations to investigate the dynamics of price and liquidity discovery, which refer to the cross-instrument forecasting power for prices and liquidity, respectively. Specifically, we seek to understand the linkage between the cheapest to deliver bond and closest futures pairs by using high-frequency data on European governments obligations and derivatives. We split the 2019-2021 sample into three subperiods to appreciate changes in the liquidity discovery induced by the COVID-19 pandemic. Within a cointegration model, we find that price discovery occurs on the futures market, and document strong empirical support for liquidity spillovers both from the futures to the cash market as well as from the cash to the futures market.

Keywords: Fixed Income, Limits to Arbitrage, Market Liquidity

JEL Classification: G12, G13, G15

Suggested Citation

Jappelli, Ruggero and Lucke, Konrad and Pelizzon, Loriana, Price and Liquidity Discovery in European Sovereign Bonds and Futures (June 10, 2022). SAFE Working Paper No. 350, Available at SSRN: https://ssrn.com/abstract=4107633 or http://dx.doi.org/10.2139/ssrn.4107633

Ruggero Jappelli

Goethe University, Frankfurt ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Konrad Lucke

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt, House of Finance (HoF), Graduate School of Economics, Finance and Management (GSEFM), Students ( email )

Gr├╝neburgplatz 1
Frankfurt
Germany

Loriana Pelizzon (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

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