Price discovery and trade fragmentation in a multi-market environment: Evidence from the MTS system

Abstract

This paper proposes new metrics for the process of price discovery on the main electronic trading platform for euro-denominated government securities. Analysing price data on daily transactions for 107 bonds over a period of twenty-seven months, we find a greater degree of price leadership of the dominant market when our measures (as opposed to the traditional price discovery metrics) are used. We also present unambiguous evidence that a market's contribution to price discovery is crucially affected by the level of trading activity. The implications of these empirical findings are discussed in the light of the debate about the possible restructuring of the regulatory framework for the Treasury bond market in Europe.

Did long-memory of liquidity signal the European sovereign debt crisis?

“…The average bid-ask spread on the local MTS is slightly smaller than the EuroMTS. Our finding is consistent withCheung, de Jong and Rindi (2005) Caporale and Girardi (2013). find the local trading platforms play a dominant role in price discovery.…”

How Has Sovereign Bond Market Liquidity Changed? - An Illiquidity Spillover Analysis

“…20% to price discovery using daily data from January 2004 to March 2006. In Caporale and Girardi (2013) they extend this work on price discovery in the light of the restructuring of the regulatory framework. Dunne et al (2010) use trade data of the last three quarters of 2005 from the Request-for-Quote platform Bondvision to compare the B2B (interdealer) segment (MTS) with the B2C (retail) segment (BondVision).…”

Private information, yield volatility, and interaction between groups of investors: Case of Indonesia government bond market

“…This also shows that customers prefer to trade or invest in bonds that have a relatively short maturity and exploit their short-term private information in their trading activities. Market fragmentation between dealers and customer make different private information and disagreement between these group of investors a substantial effect on yield volatility (Caporale & Girardi, 2013). Disagreement among customers has a stronger effect.…”

“…Some market microstructure literature propose various definitions of price discovery, among others: "price equilibrium search process" (Schreiber & Schwartz, 2009), "collection and interpretation of news" (Baillie, Booth, Tse, & Zabotina, 2002), "process incorporation of implicit information in investors' trading into market prices" (Lehmann, 2002)," a mechanism for changes in the yield curve which is a combination of heterogeneous private information and/or interpretation of public information through trades in the bond market " (Brandt & Kavajecz, 2004), "The merger of two information channels, namely direct information channels where prices adjust quickly to public information and indirect channels where prices adjust to private information reflected in order flow" (Valseth, 2013) and "unification of information at the right time into market prices" (Caporale & Girardi, 2013). We may conclude that price discovery is a naturally occurring dynamic process of market prices creation through rapid price adjustments from the old equilibrium price to the new equilibrium price which is driven by and because of the presence of a series of information, both public information and private information.…”