Price Discovery in Government Bond Markets

Challenging the spanning hypothesis at short horizons: Evidence from Norway

“…Brandt and Kavajecz find that up to 26% of contemporaneous daily yield changes in the US Treasury market can be accounted for by interdealer order flow. Valseth () finds similar results for the Norwegian government bond market. Evans and Lyons () find that in foreign exchange markets order flows have significant out‐of‐sample power to forecast exchange rates out‐of‐sample and outperform both macroeconomic models and the random walk.…”

“…The predictions focus on a subsample, the interdealer market, for two main reasons. First, Valseth () documents that interdealer order flow is more informative than customer order flow. Second, Valseth () documents that informed dealers prefer the LOB to the OTC‐market because the immediacy of the LOB better protects their information.…”

“…Second, bond market order flows appear to contain heterogeneous private information about future bond prices as order flows of individual dealers vary in forecasting ability. As Valseth () argues, dealers appear to pick up different information which can be based on their interpretations of macroeconomic news, or on watching and engaging in trades. The results for excess returns indicate that the information in order flow is related to future bond risk premia.…”