The cross-market information content of stock and bond order flow |
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Authors: | Shane Underwood |
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Institution: | Jesse H. Jones Graduate School of Management, Rice University, 6100 Main Street, Houston, TX 77005 USA |
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Abstract: | 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. |
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