The Cross-Market Information Content of Stock and Bond Order Flow
35 Pages Posted: 21 Mar 2005
Date Written: September 14, 2007
In this paper I test the hypothesis that trading activity in the stock and bond markets contains important marketwide pricing information. Using a large sample of actively traded stocks and U.S. Treasury securities, I find that aggregate order imbalances play a strong role in explaining cross-market returns. I interpret this as evidence that aggregate order flow reveals information about the risk preferences, beliefs, and endowments of the investor population that is relevant for pricing securities in both markets. I also find evidence that cross-market hedging is an important source of linkages across the two markets, especially during periods of elevated equity volatility.
Keywords: Cross-market, Order flow, Market microstructure
JEL Classification: G14, G19
Suggested Citation: Suggested Citation