Euro Area Sovereign Yield Dynamics: The Role of Order Imbalance

50 Pages Posted: 10 Dec 2004

See all articles by Albert J. Menkveld

Albert J. Menkveld

VU Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Yiu Chung Cheung

affiliation not provided to SSRN

Frank De Jong

Tilburg University - Department of Finance

Date Written: August 2004

Abstract

We study sovereign yield dynamics and order flow in the largest euro-area treasury markets. We exploit unique transaction data to explain daily yield changes in the ten-year government bonds of Italy, France, Belgium, and Germany. We use a state space model to decompose these changes into (i) a benchmark yield innovation, (ii) a yield spread common factor innovation, (iii) country-specific innovations, and (iv) (transitory) noise. We relate changes in each of these factors to national order imbalance and find that Italian order imbalance impacts the common factor innovation, French and Belgian order imbalance impact country-specific innovations, and German order imbalance only changes yields temporarily. Order imbalance, however, does not have explanatory power for the most important factor: benchmark yield innovations.

Keywords: government bond, order imbalance, euro, international

JEL Classification: G10, G15, G18

Suggested Citation

Menkveld, Albert J. and Cheung, Yiu Chung and De Jong, Frank, Euro Area Sovereign Yield Dynamics: The Role of Order Imbalance (August 2004). ECB Working Paper No. 385; EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=569632

Albert J. Menkveld (Contact Author)

VU Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Yiu Chung Cheung

affiliation not provided to SSRN

Frank De Jong

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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