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Informed and Strategic Order Flow in the Bond Markets
Authors:Pasquariello, Paolo   Vega, Clara
Affiliation:Ross School of Business, University of Michigan
Abstract:
We study the role played by private and public information inthe process of price formation in the U.S. Treasury bond market.To guide our analysis, we develop a parsimonious model of speculativetrading in the presence of two realistic market frictions—informationheterogeneity and imperfect competition among informed traders—anda public signal. We test its equilibrium implications by analyzingthe response of two-year, five-year, and ten-year U.S. bondyields to order flow and real-time U.S. macroeconomic news.We find strong evidence of informational effects in the U.S.Treasury bond market: unanticipated order flow has a significantand permanent impact on daily bond yield changes during bothannouncement and nonannouncement days. Our analysis furthershows that, consistent with our stylized model, the contemporaneouscorrelation between order flow and yield changes is higher whenthe dispersion of beliefs among market participants is highand public announcements are noisy.
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