Customer Order Flow, Intermediaries, and Discovery of the Equilibrium Risk-free Rate

44 Pages Posted: 1 Mar 2007 Last revised: 20 Nov 2012

Albert J. Menkveld

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

Asani Sarkar

Federal Reserve Bank of New York

Michel van der Wel

Erasmus University Rotterdam; CREATES; ERIM; Tinbergen Institute

Date Written: March 9, 2011

Abstract

Macro announcements change the equilibrium riskfree rate. We find that treasury prices reflect part of the impact instantaneously, but intermediaries rely on their customer order flow after the announcement to discover the full impact. This customer flow informativeness is strongest when analyst macro forecasts are most dispersed. The result holds for 30-year treasury futures trading in both electronic and open-outcry markets. We further show that intermediaries benefit from privately recognizing informed customer flow, as their own-account trading profitability correlates with customer order access.

Keywords: riskfree rate, macroeconomic announcements, customer order flow, intermediary, treasury futures

JEL Classification: G14, E44

Suggested Citation

Menkveld, Albert J. and Sarkar, Asani and van der Wel, Michel, Customer Order Flow, Intermediaries, and Discovery of the Equilibrium Risk-free Rate (March 9, 2011). Journal of Financial and Quantitative Analysis (JFQA), 17, 821-849; EFA 2007 Ljubljana Meetings Paper; FRB of New York Staff Report No. 307. Available at SSRN: https://ssrn.com/abstract=966059 or http://dx.doi.org/10.2139/ssrn.966059

Albert J. Menkveld (Contact Author)

VU University 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

Asani Sarkar

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

Michel Van der Wel

Erasmus University Rotterdam ( email )

Burg. Oudlaan 50
Rotterdam, NL 3062 PA
Netherlands

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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