Interdealer versus Customer-Dealer Sphere: Information Processing in Decentralized Multiple-Dealership Markets
This paper empirically analyzes the short-run price dynamics in the European government bond market. One distinguishing feature of bond markets is the coexistence of two different trading environments: a public environment where customers (buy side investors) trade with liquidity providers, and an interdealer environment where liquidity providers trade among themselves.56 The objective of the statistical analysis is to quantify the contribution of each market to the evolution of a bond2019;s full-information or permanent value. From an economic perspective, these contributions specify how much information is produced in the various markets, which may be related to security and market characteristics. Our analysis particularly addresses the following questions: Which market contributes more to the price discovery — the customer-dealer or the interdealer market? Is the share of the contribution to the price discovery of both markets related to security characteristics? The market for government bonds is especially suited to answer the last question since it includes a wide variety of similar but not identical issues (the issues differ in amount outstanding, maturity, and other characteristics). The question about price discovery, market sphere, and security characteristics could not be fully examined if we were inspecting different markets for a single security.
KeywordsInformation Share Impulse Response Function Government Bond Price Discovery Vector Error Correction Model
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