Quoted Spreads and Trade Imbalance Dynamics in the European Treasury Bond Market

33 Pages Posted: 9 Jan 2011

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Alessandro Girardi

National Institute of Statistics (ISTAT)

Paolo Paesani

University of Rome - Tor Vergata - Department of Economics and Institutions

Date Written: November 2010

Abstract

Using high-frequency transaction data for the three largest European markets (France, Germany and Italy), this paper documents the existence of an asymmetric relationship between market liquidity and trading imbalances: when quoted spreads rise (fall) and liquidity falls (increases) buy (sell) orders tend to prevail. Risk-averse market-makers, with inventory-depletion risk being their main concern, tend to quote wider (narrower) spreads when they think bond appreciation is more (less) likely to occur. It is also found that the probability of being in a specific regime is related to observable bond market characteristics, stock market volatility, macroeconomic releases and liquidity management operations of the monetary authorities.

Keywords: Liquidity, trading activity, Treasury bond market, Europe, commonality

JEL Classification: G1, G15, C32, C33

Suggested Citation

Caporale, Guglielmo Maria and Girardi, Alessandro and Paesani, Paolo, Quoted Spreads and Trade Imbalance Dynamics in the European Treasury Bond Market (November 2010). DIW Berlin Discussion Paper No. 1080, Available at SSRN: https://ssrn.com/abstract=1735425 or http://dx.doi.org/10.2139/ssrn.1735425

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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London South Bank University ( email )

Centre for Monetary and Financial Economics
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CESifo (Center for Economic Studies and Ifo Institute)

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German Institute for Economic Research (DIW Berlin) ( email )

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Alessandro Girardi

National Institute of Statistics (ISTAT) ( email )

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00184 Rome, 0185
Italy

Paolo Paesani

University of Rome - Tor Vergata - Department of Economics and Institutions ( email )

Via Columbia n. 2
00133 Rome
Italy

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