Tài liệu WORKING PAPER SERIES: TRADING EUROPEAN SOVEREIGN BONDS THE MICROSTRUCTURE OF THE MTS

WORKING PAPER SERIES

NO. 432 / JANUARY 2005

TRADING EUROPEAN

SOVEREIGN BONDS

THE MICROSTRUCTURE

OF THE MTS TRADING

PLATFORMS

by Yiu Chung Cheung,

Frank de Jong

and Barbara Rindi

ECB-CFS RESEARCH NETWORK ON

CAPITAL MARKETS AND FINANCIAL

INTEGRATION IN EUROPE

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WORKING PAPER SERIES

NO. 432 / JANUARY 2005

This paper can be downloaded without charge from

http://www.ecb.int or from the Social Science Research Network

electronic library at http://ssrn.com/abstract_id=647944.

ECB-CFS RESEARCH NETWORK ON

CAPITAL MARKETS AND FINANCIAL

INTEGRATION IN EUROPE

1 We thank Simon Benninga,Andrew Ellul, Cynthia van Hulle, Bert Menkveld,Avi Wohl and other seminar participants at Bocconi,

Warwick University,Toulouse,Tel Aviv university, the Hebrew University, the European Central Bank, EFA 2003, INQUIRE Meeting

in Barcelona and the Bank of Athens for their useful comments.We thank Luca Camporese,Alessandro Pasin and Stefano

Rivellini for precious research assistance and Aart Groenendijk from MTS Amsterdam.We acknowledge financial support from

INQUIRE Europe, and thank MTS Spa for providing the data.All remaining errors are ours.

2 University of Amsterdam, Department of Financial Management, Roetersstraat 11, 1018 WB Amsterdam, Netherlands;

e-mail: [email protected]

3 University of Amsterdam, Department of Financial Management, Roetersstraat 11, 1018 WB Amsterdam, Netherlands;

e-mail: [email protected]

TRADING EUROPEAN

SOVEREIGN BONDS

THE MICROSTRUCTURE

OF THE MTS TRADING

PLATFORMS 1

by Yiu Chung Cheung 2

,

Frank de Jong 3

and Barbara Rindi 4

4 Bocconi University, Department of Economics,Via Sarfatti 25, 20136 Milan, Italy; e-mail: [email protected]

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ECB-CFS Research Network on

“Capital Markets and Financial Integration in Europe”

This paper is part of the research conducted under the ECB-CFS Research Network on “Capital Markets and Financial

Integration in Europe”. The Network aims at stimulating top-level and policy-relevant research, significantly

contributing to the understanding of the current and future structure and integration of the financial system in Europe

and its international linkages with the United States and Japan. After two years of work, the ECB Working Paper Series

is issuing a selection of papers from the Network. This selection is covering the priority areas “European bond

markets”, “European securities settlement systems”, “Bank competition and the geographical scope of banking

activities”, “international portfolio choices and asset market linkages” and “start-up financing markets”. It also covers

papers addressing the impact of the euro on financing structures and the cost of capital.

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Mario Roberto Billi, Bernd Kaltenhäuser (both CFS), Simone Manganelli and Cyril Monnet (both ECB) supported the

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Working Paper Series No. 432

January 2005

CONTENTS

Abstract 4

Non-technical summary 5

1 Introduction and motivation 7

2

and the dataset 9

2.1 Primary market 9

2.2 Secondary market: The MTS system 11

2.3 Dataset 14

3 Liquidity on the MTS market 15

4 The price impact of trading in interdealer

markets 17

4.1 Interdealer trading: an overview 18

4.2 The impact of trading intensity on prices 21

4.3 Empirical results 22

4.3.1 Return equation 22

4.3.2 Quantity equation 23

4.4 The impact of news announcements 24

4.5 Impulse response functions 26

5 Conclusions 27

A Econometric details 28

B Impulse response functions 29

References 32

Tables and graphs 35

European Central Bank working paper series 46

Description of the European bond market

Abstract

We study the microstructure of the MTS Global Market bond trading system, which is

the largest interdealer trading system for Eurozone government bonds. Using a unique

new dataset we find that quoted and effective spreads are related to maturity and trading

intensity. Securities can be traded on a domestic and EuroMTS platform. We show that

despite the apparent fragmentation of trading, both platforms are closely connected in

terms of liquidity. We also study the intraday price-order flow relation in the Euro bond

market. We estimate the price impact of order flow and control for the intraday trading

intensity and the announcement of macroeconomic news. The regression results show a

larger impact of order flows during announcement days and a higher price impact of

trading after a longer period of inactivity. We relate these findings to interdealer trading

and to the structure of European bond markets.

Keywords: Bonds markets, Microstructure, Order flow

JEL classification: F31, C32

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Working Paper Series No. 432

January 2005