Positive Feedback Trading Under Stress: Evidence from the US Treasury Securities Market
Bank for International Settlements, Monetary and Economic Department, 2003 - Bond market - 39 pages
A vector autoregression is estimated on tick-by-tick data for quote-changes and signed trades of two-year, five-year and 10-year on-the-run US Treasury notes. Confirming the results found by Hasbrouck (1991) and others for the stock market, signed order flow tends to exert a strong effect on prices. More interestingly, however, there is often a strong effect in the opposite direction, particularly at times of volatile trading. Price declines elicit sales and price increases elicit purchases. An examination of tick-by-tick trading on an especially volatile day confirms this finding. At least in the US Treasury market, trades and price movements appear likely to exhibit positive feedback at short horizons, particularly during periods of market stress. This suggests that the standard analytical approach to the microstructure of financial markets, which focuses on the ways in which the information possessed by informed traders becomes incorporated into market prices through order flow, should be complemented by an account of how price changes affect trading decisions.
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10-year note 20 periods additional one unit adverse selection am-2 pm ask quotes asset autocorrelated bid and ask bid-ask spreads bond buy order Coef t-stat Coef Coef t-stat Lags Coefﬁcient estimates Coefﬁcients on signed coefs Vs normal Cumulative effect dealers different subsamples equation are multiplied equation Signed trade F-statistic February ﬁgure ﬁndings ﬁrst ﬁve-year note foreign exchange market full sample Dept GovPX Graph Hasbrouck 1991 High duration high-duration days impact of trades inﬂuence information asymmetries ln other words low-duration days market clearing market maker market microstructure market participants mutually reinforcing order ﬂow pm-5 pm Positive feedback trading price changes price increases price movements quote-changes quotes and trades Quotes and transactions reﬂect sample Dept variable short horizons short position Signed trade equation speciﬁc standard deviation Sum of coefs t-stat Coef t-stat Table trading day Treasury market Treasury notes Treasury securities two-year note Vector autoregression results volatile trading Wald test