Working Paper: CEPR ID: DP4285
Authors: Yiu Chung Cheung; Frank de Jong; Barbara Rindi
Abstract: We study the microstructure of the MTS Global Market bond trading system. This system is the largest pan-European interdealer trading system for Eurozone government bonds. We study the volume weighted quoted spread and a variety of effective spread measures for different classes of bond maturities and issuing countries. We find that quoted and effective spreads are related to maturity and trading intensity. Estimated spreads on EuroMTS are typically slightly higher than on the domestic markets, but the difference is small in economic terms. The regression results show that order flow plays a key role in determining the price discovery in the bond market. Transitory costs are more important in markets like Italy and Belgium, which are dominated by local traders. In addition, we find a positive relationship between trading intensity and price returns, indicating findings relevant to the structure of bond markets and interdealer trading.
Keywords: bonds; markets; microstructure; order flow
JEL Codes: C32; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| order flow (C69) | price discovery (D47) |
| trading intensity (F12) | price returns (P22) |
| trading intensity (low) (F19) | price impact (G14) |
| market composition (L11) | trading costs (F12) |
| trading activity levels (F19) | price formation dynamics (L11) |