The Relative Importance of Information, Inventory and Price Clustering for Stir Futures Pre- and Post-Emu

Abstract

This paper applies an established bid-ask spread decomposition model to short-term interest rates (STIR) futures to assess the impact of both the migration from floor to electronic trading and European Monetary Union (EMU). Additionally, the paper presents and tests a modified decomposition model which is specifically adapted to the features of order-driven markets. The latter model provides much improved performance. Price clustering is introduced as a new explanatory factor within this framework and is shown to be vitally important in understanding the bid-ask spread and price determination.

Keywords: High frequency data, Futures, Market infranstructure, Asymmetric information, Order-driven

JEL Classification: F30, G13, G15, D4