Working Paper: CEPR ID: DP15028
Authors: Dong Lou; Robert Czech; Shiyang Huang; Tianyu Wang
Abstract: Using comprehensive administrative data from the UK, we examine trading by different investor groups in government bond markets. Our sample covers virtually all secondary market trading in gilts and contains detailed information of each transaction, including the identities of both counterparties. We find that hedge funds’ daily trading positively forecasts gilt returns in the following one to five days, which is then fully reversed in the following month. A part of this short-term return predictability is due to hedge funds’ front-running other investors’ future demand. Mutual fund trading also positively predicts gilt returns, but over a longer horizon of one to two months. This return pattern does not revert in the following year and is partly due to mutual funds’ ability to forecast changes in short-term interest rates.
Keywords: government bonds; informed trading; return predictability; asset managers
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Hedge fund trading (G19) | Gilt returns (G12) |
| Hedge fund trading (G19) | Mutual fund trading (G23) |
| Mutual fund trading (G23) | Gilt returns (G12) |
| Hedge fund trading (G19) | Higher returns on announcement days (G14) |