Private information and client connections in government bond markets

Kondor, Peter ORCID: 0000-0001-9797-9291 and Pinter, Gabor (2019) Private information and client connections in government bond markets. CFM discussion paper series (CFM-DP2019-01). Centre For Macroeconomics, London School of Economics and Political Science, London, UK.

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Abstract

In government bond markets the number of dealers with whom clients trade changes through time. Our paper shows that this time-variation in clients’ connections serves as a proxy for time-variation in private information. Using proprietary data covering close to all dealer-client transactions in the UK government bond market, we show that clients have systematically better performance when trading with more dealers, and this effect is stronger during macroeconomic announcements. Most of the effect comes from clients’ increased ability to predict future yield changes (anticipation component) rather than these clients facing tighter bid-ask spreads (transaction component). To explore the nature of this private information, we find that clients with increased dealer connections can better predict the fraction of the aggregate order flow that is intermediated by dealers they regularly trade with. Positive trading performance is concentrated in those periods when clients have more dealer connections than usual.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://www.centreformacroeconomics.ac.uk/Discussio...
Additional Information:	© 2019 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies
Date Deposited:	03 Jun 2019 15:15
Last Modified:	01 Oct 2024 04:04
URI:	http://eprints.lse.ac.uk/id/eprint/100931

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